12.22.2008 9:57 am
Your turn: Will inflation return next year?
St. Louis Post-Dispatch
Deflation has been the big topic of discussion among economists lately, especially at the Federal Reserve. This Chicago Tribune piece even says that a little inflation would be a good thing. Many ordinary people, though, aren’t so quick to cast aside their dislike of steadily rising prices, or their suspicion that inflation will soon return with a vengeance. Here’s a chance to say which way you think prices are headed.
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(1 votes, average: 4 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Because deflation (or at least reduced inflation) typically accompanies recessions, it is erroneously regarded as a cause of the recession. Instead, it is a symptom of the underlying problem of a reduction in aggregate demand resulting from a reduction in the money supply and also (probably) the “velocity” or recirculation rate of money. As I have said elsewhere, the twin, complementary solutions are for the Federal Reserve to pump up the money supply and for individuals and firms to reduce their wages and prices. The goal is not to achieve either inflation or deflation, but rather to sustain real economic output by sustaining real consumption and investment.
There is the risk that too much monetary stimulus for too long will cause excessive inflation (at worst accompanied by a lack of real stimulus as occurred in the “stagflation” of the 1970s). But for the more immediate future of 2009, I don’t think that much inflation will occur. Anybody purchasing food, a car, gasoline, natural gas, or a house should be happy about that.