MiddleOfRoader

The Deflation Risk Keeps Rising

Perhaps more important than the PPI change is how much gets passed through to the consumer. Competition in many industries would not allow them to pass through much of the increased cost of goods when the PPI was rising and they would have to eat the increased cost. Now that the PPI is falling, producers can recoup some of the cost they had to absorb earlier by not passing the savings on to consumers as quickly as they are realized at the producer level.

At some point energy prices will level out. If consumer prices are still in decline after that due to slack demand, that might be the time to start worrying.

Government transfer payments provide a certain base level of demand. Social Security benefits will be increasing 5.8% for January, a not too shabby increase for that segment of the population.

A trillion dollar stimulus package would also act to keep deflation at bay for awhile.