Gary Shilling: The U.S. Is on the Cusp of Deflation
He could be right. Earlier this month, the consumer price index, which measures inflation, dropped by 0.1% in June following a 0.2% fall in May and a 0.1% fall in April. Shilling says that 53% of the components of the index, by weight, showed price declines on a year-over-year basis. That, combined with the country's massive government debt and consumer debt, makes the chances of deflation seem more likely and suggest that the Fed's efforts have not completely succeeded.
Many economists would argue that deflation is still not a real concern and that there has not been sustained deflation since the 1930s in the U.S. But inflation has been negligible over the past year and Shilling says that this low inflation could turn into deflation.
If that happens, a true economic recovery could take years. The reason: In a deflationary environment consumers begin waiting for prices to keep falling before making purchases. That, in itself, means that inventories begin to pile up and merchants are forced to cut prices to increase demand.