Few economic events stir up fear faster than deflation. In a technical sense, deflation is merely the opposite of inflation; overall prices drop rather than rise. It doesn't mean that all prices drop, but the average of all prices drops during deflation.
The fear factor that deflation brings is because it is associated with bad economic times rather than good times. The NY Times graph below does a good job of showing this association. Note that in the shaded areas, areas when the economy is in recession, is also the time, for the most part, when price deflation occurs. There are brief periods where year over year prices may fall for a short time without being in recession, but in all cases where falling prices lasted for a long time, a recession or depression was in
process.
To read the balance of the article, including the analysis of the chart, and to see the latest release of leading economic indicators for November, follow this link.
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