Filed under: Housing, Federal Reserve, Recession
With the prices of oil and housing dropping, what companies charge for a number of key goods and services could start to fall. Firms may have to drop the prices of what they charge for everything from clothing to cars to toothpaste.
Instead of inflation being the next great enemy of the economy, it could be deflation that actually causes a wave of trouble.
According to The Wall Street Journal (subscription required), “the financial shock and a faltering economy can set the stage for a deflationary environment.” The paper goes on to state that the Fed thinks the chances of that are unlikely. This means the bureau will probably not drop rates again. Superior to keep them high and push the cost of money up a bit.
The Fed probably has it wrong. Leaving aside other factors, housing prices have come down over 20% from their peaks in most places. In hard hit geographic areas like California and Florida, the correction has been closer to 30%. To make matters worse, home prices are still falling.
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