Beware of deflation!

Les Echos newspaper warns of deflation in the ongoing economic crisis: "Of course sinking prices are not enough to warrant proclaiming deflation. Nevertheless consumer prices in the US sank by one percent in October, the biggest drop in 60 years. This is just one more piece in the deflation puzzle that has been fitting itself together in recent months. Share prices have sunk by half in Paris and on most major stock exchanges since the beginning of the year. Real estate prices in the US, which have dropped by almost 17 percent in one year, are also sinking in Europe. The fall in prices is now being felt in daily consumer goods. For the governments this is a new challenge. Deflation poses a far greater risk than inflation because it blocks the economy and kills classical monetary policy. When prices are sinking credit is too expensive even with an intrest rate of 0.1 percent. The central banks must apply other, more precarious monetary weapons. Governments must be quick in introducing a recovery policy."

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