As Economy Slows, Deflation Could Loom

In this article Washington Post Staff Writer, Michael Fletcher addresses recent price drops. As consumer spending has slowed, the price of oil and other commodities has fallen sharply. Some economists are worried this could create a cycle in which weak consumer demand, falling prices and tight credit would cause even lower demand and lower prices. Some businesses would struggle to stay open, something that would trigger higher unemployment and feed the cycle.
Other economists note that a period of price adjustment does not necessarily mean the start of a deflationary period. They argue that a few months of price declines should not be a problem for the economy.
Bill Gross, co-chief investment officer at Pimco, and investment management company states that price drops shouldn't be able to last more than a few quarters as capitalism depends on mild inflation.
The article makes reference to a couple of cases. One is Japan in the 1990's, when they had prices decline about one percent per year.The result was slow growth and increasing unemployment. In the United States a similar case occured five years ago when inflation started approaching one percent. The response was a cut to the Federal Reserve's lending rate to one percent which stopped the deflation threat. This suggests that government intervention can prevent deflation from occuring.
The current drop in the level of prices does not mean that ther will be a continuous fall of prices but if the deflation threat becomes any greater, government will be forced to intervene just as it has been doing in the last few weeks. It would be needed save businesses, give people some assurance and to prevent another serious problem in the ongoing crisis.