In the Swiss National Bank's decision Thursday to drop its ceiling on the franc, there's a lesson for other nations, says Nobel laureate economist Paul Krugman.
"What’s important is the demonstration of just how hard it is to fight the deflationary forces that are now afflicting much of the world,"
he writes in The New York Times. (Editor's Note: Deflation is a decrease in the general price level of goods and services and occurs when the inflation rate falls below 0 percent, or a negative inflation rate).
And it's not just Europe and Japan at risk, Krugman explains. "While America has had a pretty good run the past few quarters, it would be foolish to assume that we’re immune."
Many economists believe the Federal Reserve should raise rates soon. "But why?" Krugman asks.
"There’s no sign of accelerating inflation in the actual data, and market indicators of expected inflation are plunging, suggesting that investors see deflationary risk even if the Fed doesn’t."
He's concerned too. "If the U.S. recovery weakens, either through contagion from troubles abroad or because our own fundamentals aren’t as strong as we think, tightening monetary policy could all too easily prove to be an act of utter folly."
A deflationary trend already may have begun. The government reported Friday that consumer prices fell 0.4 percent in December, the biggest drop in six years. That put the gain for all of 2014 at just 0.8 percent, the smallest 12-month advance since October 2009.
"This is a number that consumers will love, but economists will worry about," Russell Price, senior economist at Ameriprise Financial,
told Bloomberg.
The
Wall Street Journal's survey of 66 economists produced an average forecast for only 0.5 percent consumer price inflation in the 12 months through June, with 25 percent of the economists expecting deflation during that period—as much as 1 percent deflation.
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