Low Inflation Everywhere Is Shrinking Growth

Popular Economics Weekly

Deflation is a rising risk for the U.S. economy based on import and export price data where contraction is at its most severe since the 2008-2009 recession, as well as for the rest of the world. U.S. import prices fell 2.8 percent in January alone for year-on-year contraction of 8.0 percent. And it’s much more than just the impact of the strong dollar as export prices are also in contraction, at minus 2.0 percent for the month and minus 5.4 percent on the year, reports Econoday.

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Graph: Econoday

Another sign of deflationary tendencies is that U.S. consumer spending barely rose in January as households cut back on purchases of a range of goods, suggesting the economy started the first quarter on a softer note. Sluggish spending came despite cheap gasoline and a buoyant labor market, leaving economists to speculate that consumers were using the extra income to pay down debt and boost savings.

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Graph: Thomson-Reuters

The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1 percent last month. But overall retail sales slipped 0.8 percent in January, declining for a second straight month as falling gasoline prices undercut sales at service stations. This is after consumer spending, which accounts for more than two-thirds of U.S. economic activity, expanded at its quickest pace since 2006 in the fourth quarter.

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Graph: Trading Economics

But even falling gas prices are a sign of deflation, as it means there is lower demand for energy products everywhere in the world, as I said. In fact, consumer prices are already falling in the Eurozone, -0.2 and -0.6 percent, respectively, in the past 2 quarters, signaling an outright recession. Paul Krugman has even said the Eurozone is now in their Second Great Depression.

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Graph: Calculated Risk

So why are consumers paying down debt with their extra pocket money? The preliminary University of Michigan consumer sentiment index for February was at 93.6, down from 98.1 in January. Higher gasoline prices are probably the reason for the decline in February, and that’s enough to make consumers more cautious with their spending.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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