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U.S. economy is not at risk of deflation, economists say

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U.S. economy is not at risk of deflation, economists say

Researchers say the Federal Reserve shouldn't divert from its tapering timeline.

As experts debate what the Federal Reserve should do about inflation, economists at financial services group BBVA Compass say in their latest research that the policymaking board shouldn't divert from its timeline on tapering because the U.S. economy is not at risk of tipping into deflation.

Last year, the Fed purchased $85 billion worth of bonds each month to help stimulate the economy. It started tapering those purchases in December amid signs that the economy was modestly improving. However, one indicator closely monitored by the Federal Reserve — the rate of inflation — is much below its target of 2 percent. Sluggish price growth can put a vulnerable economy at risk of deflation, which imposes risks of stagnant growth and can increase the value of the U.S.'s outstanding debt.

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"Although inflation remains lower than expected, our analysis suggests that the risk of deflation in the U.S. is very low."That has led to some speculation that the Fed will slow its retreat from stimulus activities, but BBVA Compass economists Shushanik Papanyan and Kim Fraser say it should stay on its current course.

"Although inflation remains lower than expected, our analysis suggests that the risk of deflation in the U.S. is very low," they wrote in their inflationary research. They said the risk, in fact, had "dropped significantly throughout the first quarter of 2014, suggesting that the current slowing inflation rate is considered fairly transitory."

They predict that most prices will moderately rise in the next year, though technology will continue to put downward pressure on prices in all sectors.

"Inflation will stabilize at new historic lows as a result of long-term economic structural changes, such as lower costs of production and labor-to-capital ratios driven by globalization and infiltration of technology," the economists wrote.

 

 

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