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What to fear more: Inflation vs. deflation

Julia Coronado Jan 30, 2012

Jeremy Hobson: The government said this morning that consumer spending stayed flat in December. But personal incomes were up, so it appears Americans are saving that extra cash.

For more on that, let’s bring in Julia Coronado, chief economist with the investment bank BNP Paribas. She’s with us live from New York as she is every Monday. Good morning, Julia.

Julia Coronado: Good morning.

Hobson: So we’re saving a little bit more. Is that a good thing?

Coronado: Well, that’s a good thing and a bad thing. On the one hand, it’s great that consumers are now living within their means to a greater extent than in the past. So when you see a burst of spending, then they slow down and rein it in and save a little bit more. And that’s good. On the other hand, it does mean that slower growth for the economy is probably with us for a while.

Hobson: And put this together with some of the other trends we’re seeing: nobody wants to really buy stuff right now unless they’re getting deep discounts. People are holding out on buying houses because they think maybe they’ll get a better deal going forward. Isn’t this — possibly — textbook deflation?

Coronado: This is exactly the scenario that keeps the Fed awake at night, and one of the reasons that they’ve been determined to stay aggressive. Indeed, if consumers know that they’re going to get a better deal next year, next month, then why spend now? So deflation can be very insidious that way, and lock in lower and lower spending.

On the other hand, you know, consumers’ wages just aren’t rising. And so if they don’t have greater purchasing power, they can’t go out and spend. So I’m not sure that the Fed can fix that one quickly.

Hobson: Julia, we hear more about inflation than deflation. Is inflation still a concern for you?

Coronado: You know, again, we can see bursts of inflation like we did last year — usually driven by global developments in energy markets. But it’s not going to last as long as consumers don’t have the wages to absorb it. So when we saw inflation last year, consumers just stopped spending. And that itself took the wind out of commodity prices. So there’s a very limited extent to which I think we could really see inflation rise over the long-term.

Hobson: Julia Coronado, chief economist with the investment bank BNP Paribas, thanks as always.

Coronado: It’s a pleasure.

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