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Deflation is worse than inflation because it is harder to control. At least within segments of the economy, deflation is already happening. As technology progresses, deflation happens when measured against a constant standard – a modern computer that matches a 1990 computer’s performance is much cheaper. The deflationary pressures in the economy now, however, are much larger. Commodity prices (including oil) are down. Strong economies like China and Germany have been experiencing deflationary producer prices for the last few years; and now the US is experiencing something similar. Unfortunately, the normal tool to combat deflation is to lower interest rates, but US interest rates are already at zero. The Fed may raise rates in hopes that the job growth will accommodate them, and thereby providing some maneuvering room; but it could also curtail growth, approach recession which may also fuel deflation. At the same time, the money supply is so high that inflation seems inevitable. A very touchy time.

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