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To: long-gone who wrote (18833)	9/19/1998 11:39:00 AM
From: goldsnow	Read Replies (1) \| Respond to of 116759

Deflation Not Yet A Concern For U.S. Policymakers 08:19 a.m. Sep 19, 1998 Eastern By Svea Herbst-Bayliss NEW YORK (Reuters) - For years U.S. policy-makers have battled rising prices, but now some economists fear a deepening global economic crisis and stock market turmoil could create an entirely new headache: falling prices. With Latin America teetering on the edge of a far-flung financial crisis that sent Japan into recession and Russia to the brink of collapse, fears are mounting that one result might be deflation in the U.S. economy. As much as consumers might like to think that falling prices would be a boon to their pocketbooks, economists have a more alarming view. Falling prices, or deflation, can lead to a slowdown in the overall economy. It was one hallmark of the Great Depression of the 1930s. Sharp price declines can cause economic retrenchment by slashing business and consumer spending. Simply put, if prices are falling, businesses have less incentive to produce goods, and consumers have less incentive to buy them. The United States has not seen a full year of consumer price deflation in decades. But when Federal Reserve Chairman Alan Greenspan Wednesday told Congress that deflationary forces may be moving toward the United States, he sent shivers through financial markets. ''Right now a lot of people see deflation under every rock,'' admitted Henry Willmore, senior economist at Barclays Capital, pointing to steady softness in consumer prices. While the Federal Reserve is clearly paying more attention to deflationary dangers, economists stressed that deflation in Japan and even in Europe would pose no immediate danger for the United States. ''For the overall domestic picture, this is not that big of a deal,'' said David Greenlaw, economist at Morgan Stanley. Nonetheless, worries about deflation persist. Evidence of falling prices may be seen in the U.S. producer price index, which shrank 0.8 percent over the 12 months ending in August. Meanwhile many commodities prices have fallen sharply as a stronger dollar made imports less expensive, while recessions abroad have trimmed overseas demand for industrial goods. Consequently U.S. consumers have enjoyed steady or falling prices for automobiles, gasoline, clothing and computers. At the same time however, prices of medical services, apartment rents and many services remain high and more than offset some of the lower prices, economists said. Consumer inflation is running at an annual 1.6 percent rate over the last 12 months, with the core rate, which strips out the food and energy components, posting a 2.5 percent rise. That suggests inflation remains a concern, economists said. ''I would emphasize it's not dramatically higher, and we still have low inflation rates. But the direction has been higher for inflation this year rather than lower,'' said Michael Moran, chief economist at Daiwa Securities America Inc. With some economists saying the risks of inflation are nearly the same as the risks of deflation, the Federal Reserve is likely to remain on guard, ready to strike at the first signs of an economic slowdown. Faced with deflation, central banks would likely try to stimulate growth by cutting interest rates and boosting liquidity. ''The Fed has enough room to do this if deflation were closer on the time spectrum,'' Morgan Stanley's Greenlaw said Currently, domestic concerns do not warrant a rate cut, economists agreed, though some said the Fed may still ease rates for international reasons. ''Deflation is not a high probability event'' but with the Clinton administration concerned about the economy, calls for a precautionary rate cut may well pick up, Willmore said. Copyright 1998 Reuters Limited.