Deflation Scare Put on Temporary Hold

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A customer using a credit card at a gas station in Miami, Florida.

Concern over disinflation and deflation will probably be put on hold in coming months as commodity prices stabilize, according to economists at Jefferies & Co. in New York. They also contend it will be too soon for Americans to let down their guard.

Changes in monthly price measures in the U.S. are often dictated by swings in energy costs, particularly gasoline, economists Ward McCarthy and Thomas Simons show in a report today. The increase in gasoline prices in May, a month when they are typically little changed, will help boost headline inflation readings this month and maybe next, they said. The change would avert disinflation, when inflation cools to the point that it’s too low, or dreaded deflation, the vicious cycle of declining demand and prices that has plagued countries including Japan.

In addition, commodity prices slumped in the second quarter of 2012, which will provide an artificially low threshold for year-to-year comparisons and make it look like inflation readings are at least stabilizing this quarter.

That will probably not be the case in the second half of the year. Commodity prices shot back up in the third quarter of 2012, so any stabilization this year will again make disinflation rear its head, McCarthy and Simons said.

Japan’s efforts to devalue the yen and regain some advantage for its exports will probably push the value of the dollar up, depressing commodity expenses for U.S. manufacturers, the economists said.

U.S. efforts toward energy independence will also “continue to limit the upside potential of energy prices,” they wrote.

McCarthy and Simons conclude with this thought: “The recent behavior of commodity prices in general and gasoline prices specifically, indicate that the risk of commodity deflation appears to be easing in the near-term, but is likely to reemerge as an issue during the summer in the absence of a sustained rise in commodity prices.”

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