dictionary definition of deflation
dictionary definition of deflation - 
Listen To The Story

Jeremy Hobson: Tomorrow Fed Chairman Ben Bernanke will speak at a conference in Jackson Hole, Wyo. And a lot of economists think he just might announce some new Fed policy to boost lending and spending -- maybe something along the lines of the $600 billion bond-buying program called Quantitative Easing 2 that the Fed just recently wrapped up. If Bernanke does make an announcement like that, it means he's more worried about deflation than inflation.

Let's bring in Marketplace economics correspondent Chris Farrell to explain. Good morning.

Chris Farrell: Good morning.

Hobson: Well first, Chris, remind us what deflation is and why we're so concerned about it?

Farrell: Inflation -- that's what we're used to. Inflation is a rise in the overall price level. Deflation is the decline in the overall price level. Now, we've had a couple of brief episodes in recent history, but the real episode of deflation in our economy was the Great Depression, and that's why we worry about it.

Hobson: Not really something we want to be comparing ourselves to right now. Well Chris, I mean, are we really at risk of deflation again in 2011?

Farrell: You know, if you look at the Consumer Price Index, it's rising at a 3.6 percent annual rate -- what's the problem, right? Prices are going up, we're still seeing inflation. But our economy is slowing down; Europe is slowing down. And if you look at the forward market-based indicators about inflation, they're telling us that the inflation rate is going to come down. So I think part of the debate that's going on here, Jeremy, is there's sort of the "apocalypse soon" crowd that keeps saying "inflation, inflation, inflation." But -- what inflation? And then there's another crowd -- and I think that this is the Bernanke Fed, or at least Dr. Bernanke -- is concerned that the U.S. economy will become like Japan. It's sort of entering into a period of a deflationary sludge. Two decades of slow growth, not a lot of job creation, and an ineffective monetary policy in dealing with deflation.

Hobson: And is monetary policy what you use to deal with deflation? Or is it something that requires some help from the fiscal side as well -- from Congress?

Farrell: Well under normal conditions, you would do... Ben Bernanke used to be called "helicopter Ben" because he was asked this question famously, and he said, "Look, if we have worry about deflation, we'll take helicopters, and we'll just spread money over the economy, and that ends it."

Hobson: Yeah.

Farrell: That's in a normal environment. Well, that's not what's happening right now. Monetary policy right now is the only lever that we have. It can help. But boy, the best thing that could happen is to get the economy growing, to have an activist fiscal policy, and under those circumstances, guess what, Jeremy? We start worrying about inflation.

Hobson: Ah, simpler concerns. Marketplace economics correspondent Chris Farrell. Thanks, Chris.

Farrell: Thank you.