Does the Plunge In Oil Prices Mean We Have to Worry About Deflation?

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Friday, 06 May 2011 05:02

In policy circles the worst thing you can do to a leading expert is to hold him/her accountable for their views. Remember all those folks who thought the economy and the housing market were just fine in 2006? They're all still there, using their expertise to opine on and guide economic policy. It is considered excessively cruel to point out that these experts somehow could not see the biggest downturn since the Great Depression until we were in the middle of it.

Anyhow, there is a subset of policy types who had been complaining about the rising price of oil and other commodities as evidence of runaway inflation. This in turn was usually attributed to the Fed's quantitative easing policy.

Now that these prices have fallen sharply, these experts presumably fear deflation. Hopefully we will be reading articles in coming days in which these experts insist on the need for more aggressive monetary policy in order to protect the economy against this threat.