With the consumer price index flatlining, economists are watching warily for signs of deflation. The Fed said on Aug. 10 it would buy Treasury bonds to ward off fears that the recovery is stalling, which could bring falling wages and prices. Meanwhile, home sales appear set to drop now that a federal tax credit has expired. But the commodities market is one place where signs of deflation aren't visible. Copper is up some 14 percent over the last year, oil is still near $80, and wheat is skyrocketing. Some economists warn that inflation, not deflation, is the real threat. What is going on?
It may be "biflation," a concept now gaining currency on economic blogs. The term is generally defined as inflation and deflation occurring simultaneously in different parts of the economy—specifically, rising prices for commodities that trade in global markets and falling prices for things bought with credit domestically, like homes and automobiles. "I think there's some truth to it," says Nariman Behravesh, chief economist at IHS Global Insight, noting that demand from India and China buoys metal and oil, while unemployment and weak consumer demand in the U.S. keep home prices low. Some economists remain skeptical. Columbia University's Ricardo Reis says it's common sense that when overall inflation is near zero, sectors will be positive and negative in equal proportion. Others point out similarities to stagflation, or rising prices plus sluggish growth. One thing is certain: the U.S. recovery is fragile. Whichever "flation" takes hold, at least we'll have a name for it.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
