First the good news. It looks like inflation is under control. Now the bad news. Deflation looks like it could be rearing its ugly head.
Tell Tale Signs
A few tell tale signs emerged on Wednesday after new data showed consumer prices dropped at the fastest rate on record in October and new home construction was at a record low.
When you combine that data with oil prices around $55 a barrel, "it appears we are in a period of disinflation right now, where the actual level of inflation is trending lower," says Michael Sheldon, chief market strategist for RDM Financial, Westport, Connecticut.
What's Wrong With Lower Prices?
On the surface deflation sounds like a boon for the economy. Essentially it’s falling prices and who doesn’t love a bargain?
Trouble is the pattern of falling prices is hard to stop because it feeds on itself.
Here’s how it works: As prices drop would-be buyers put off purchases in hopes of getting a lower price, later. That in turn creates a drop in demand which retailers counterbalance with lower prices.
Typically deflation is attacked by dropping interest rates which pushes demand higher. But the Fed doesn’t have a lot of wiggle room on the downside, anymore.