BOSTON — For at least 20 years, inflation has posed the major challenge for America's economic policymakers.
Especially in the early 1980s, householders often scrambled to keep earnings rising as fast as prices.
Almost suddenly, the concern is deflation - a fall in the overall price level.
"Nonsense," says economist Charles Plosser of the University of Rochester in New York. "There is ample monetary growth to prevent systematic deflation."
In other words, the Federal Reserve is providing enough new money to keep overall prices from a long-term decline.
It isn't like deflation in the Great Depression, when the Fed let the supply of money [currency plus checking deposits] fall 25 percent between 1929 and 1933. That pushed price levels down 22 percent in those years.
Nonetheless, deflation could happen for a month or a quarter, says Mr. Plosser, dean of the university's business school.
Deflation, a popular journalistic topic last autumn, got a revival last week after Fed Chairman Alan Greenspan used the "D word" 18 times in a talk to the American Economic Association in Chicago.
His speech essentially said that deflation makes it harder for investors and consumers to know how best to use their money. Their mistakes will slow growth.
His talk was one factor in the decline in long-term interest rates to a 20-year low last week.
Deflation discussion has also been stirred by statistics. Wholesale prices last year fell 1.2 percent, the Labor Department said Thursday.
Consumer prices likely rose less than 2 percent last year, economists say. Actual numbers come out tomorrow.
Already, though, prices have fallen for goods other than food and drink. Commodity prices also have declined.
"All the inflation comes from the service sector," says Charles McMillion, a Washington economic consultant. "Anybody worried about inflation has to find something else to worry about."
That could be deflation.
"Disinflation [a slower rise in prices] has gained momentum, and it appears that deflation is the threat today," notes Brian Wesbury, chief economist of Griffin, Kubik, Stephens & Thompson, a Chicago brokerage.
Economists are debating the merits of slight inflation versus minor deflation.
At the Fed's branch in New York, Erica Groshen and Mark Schweitzer have written a long paper concluding that some inflation - under 2.5 percent - has "beneficial grease effects" in the job market. It enables employers to adjust wages rapidly for different categories of workers.
Alexander Wolman, writing in the Richmond Fed's Economic Quarterly, finds that moving to zero inflation offers almost the same benefits as slight deflation.
Actually, prices did fall modestly for years in the last century, notes Mr. Plosser. "It's not clear it was a bad thing."
But that won't happen now because there has been no reduction in the growth of money. Rather, the supply of money - the fuel for economic growth - has been rising at a faster than 5 percent rate.
So, to Plosser, just as rapid inflation is impossible without rapid growth in money, deflation won't happen without the Fed shrinking the money supply.
"There is no way the Fed is going to let that happen," he says.
Greenspan himself talked of possible "detrimental" effects of deflation. One arises from the fact that interest rates can't fall below zero. If prices fall, real interest rates (taking account of deflation) start to rise, squeezing the economy.
In Japan, for example, prices have fallen and the economy has stalled.
The East Asia financial crisis could flood the United States with cheap imports and reduce some prices. But prices of other goods and services - hotel rooms, air fares, books, for example - are up.
Looking at the broadest measure of average prices, that for the entire economy, there is still modest inflation - about 2 percent in 1997. Not deflation.