The specter of deflation is haunting more than New England Patriots quarterback Tom Brady. The whole U.S. economy is now grappling with its effects.
As growth splutters, the world's largest economy is facing the real possibility of a spiral in prices. On Thursday, the Producer Price Index for Final Demand showed that prices fell by 0.4 percent in April compared to March, and by 1.3 percent versus last April. The readings according to the previous-used PPI data series, known as PPI for finished goods, looked even worse, with a monster 4.4 percent year-over-year drop.
Steep price drops can be perilous for the growth of an economy that's comprised of nearly 2/3 consumer spending. While falling prices may sounds attractive from a consumer standpoint, they are bad for the overall economy since deflation encourages people to save, rather than spend, money. After all, why spend a dollar today when it will be worth the equivalent of $1.05 tomorrow?
However—and perhaps unlike the Patriots' embattled quarterback—the U.S. has a good excuse for the potential deflationary shock: Oil.
Crude's slide over the past year has reduced macro price metrics tremendously. And indeed, when energy and food prices are stripped out to produce what's known as the "core inflation" measure, PPI for Finished Goods actually rose by 2 percent over the course of the year. On the other hand, the core PPI for Final Demand number still fell 0.2 percent from March to April.
Simultaneously, some maintain that no matter how noisy the inflation reading may be, there are still bad signs embedded in it.
"The PPI came in well below expectations and trying to pin the drop in wholesale prices on any one component would be a mistake," wrote Steven Ricchiuto, Mizuho's unconventional chief economist. "The loss of upside momentum in prices is broad-based."