Deflation Rears its Ugly Head

Personal spending cost consumers 0.7% more in the fourth quarter of 2011 than it did in the third quarter, the smallest boost to inflation in more than a year. The Federal Reserve’s inflation target of 2% was never in danger. And that’s the problem.

Personal consumption was paid for out of savings in the fourth quarter, not with credit. Lending to businesses loosened up a little in the first nine months of the year, before tightening up again in the fourth quarter on concerns about the financial crisis in Europe.

Concern about deflation in 2012 will get another push this morning from the BEA’s latest release of personal income and expenditures. In December, personal spending rose by just 0.1% and for the year it rose just 2.2%. US consumers are saving more and spending less — and who can blame them? But numbers like this put the US on a clear deflationary path, with thoughts of a second recession trailing along not far behind.

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