Deflation Fears

Just when Americans were ready to declare victory in the war against inflation, a new potential enemy has appeared: deflation. Some economists, citing both long-term changes in the global economy and the current economic crisis in Asia, warn that the U.S. faces a greater danger today that prices might fall uncontrollably than that they will start climbing again. Many economists dismiss such fears, and insist that inflation remains the greater hazard. But jitters over the continuing financial turmoil in Asia have led theoreticians and policy-makers to re-examine some basic assumptions about how the U.S. and global economies work. In particular, they wonder whether businesses and financial institutions are equipped to avert the problems that can arise from falling prices – including higher unemployment and bankruptcy.