American Enterprise Institute for Public Policy Research
by John H. Makin
As we enter the second half of 2010—the “postcrisis” year—while markets have been obsessed with Europe’s debt crisis, they have failed to notice
potentially more ominous developments. The United States and Europe are heading toward—and Japan already suffers from—deflation, a classic
prolonger of crises that boosts the real burden of debt and crushes profit margins.
U.S. year-over-year core inflation has dropped to 0.9 percent—its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe’s year-over-year core inflation rate has fallen to 0.8 percent—the lowest level ever reported in the series that began in 1991. Heavily indebted Spain’s year-over-year core inflation rate is down to 0.1 percent. Ireland’s deflation rate is 2.7 percent. As commodity prices slip, inflation will become deflation globally in short order.