US producer prices: a new sign of deflation?

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    Shoppers browsed washers and dryers earlier this year at a Best Buy electronic store in New York. Prices for washers and dryers declined last month, the Commerce Department reported Tuesday.
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The battle has been raging for months: Is the US about to sink into inflation or deflation?

The evidence has been mixed. The latest data from the Commerce Department bolsters the case of the deflationistas. The department's producer price index for finished goods rose a seasonally adjusted 0.2 percent from April to May, thanks entirely to a rise in energy prices. Minus the volatile energy and food sectors, the so-called core rate of inflation actually fell 0.1 percent.

That makes the past six months the most benign period for core inflation since the six months ended in December 2006. Prices were up but only slightly (excluding food and energy, again). For the past three months, core inflation has been virtually flat, zippo, nada.

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So what are the inflationistas worried about? The dramatic increase in government spending plus the enormous influx of money that the Federal Reserve is pushing into the economy. At some point, they argue, the spark of recovery is going to ignite all that money and the fires of inflation will roar.

The economy may have less slack than most people think, points out the Real Time Economics blog.

But the slump isn't over, the deflationistas retort, and the bigger danger for government and the Fed is that they stop their stimulus too early. The central bank is currently using the least effective stimulus method, argues The Money Illusion blog.

What really separates these camps is timing. Inflation pressures will pick up at some point, but if the Fed and the government can pull back at the right moment, it won't roar out of control.

Of course, that will require exquisite timing from policymakers in Washington.

Can they do it?

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