By James Saft
(Reuters) – The Federal Reserve can and will fight the threat of falling prices.
What is a lot less clear is whether the extraordinary monetary policy we may soon be seeing will be effective in staving off another recession.
The recent run of data on prices has shown a clearly falling trend, doubtless driven by a recession in Europe and a marked slowing in China’s economy.
U.S. manufacturing contracted in May, according to a survey from The Institute for Supply Management. Even more striking: the index of prices paid decreased to 37 from 47.5, with 50 denoting the line between rising and falling prices. That is nothing less than a lurch towards deflation.
The consumer price index fell by 0.3 percent in May on a seasonally adjusted basis, the first such fall in two years and the worst since December 2008, at the height of the financial crisis.