Unchecked deflation could thwart recovery

By Dean Calbreath Union-Tribune Staff Writer

Over the past couple of weeks, there have been growing signs that the economy may be turning the corner. Although things aren't necessarily getting better, they at least appear to be slowing their descent.
The latest piece of good news came yesterday, when for the first time in five months, new filings for unemployment dropped below the 600,000 mark. Recent data have also shown that the decline in home prices has slowed locally and nationally, businesses are selling off their inventories, and shoppers are returning to stores.
“The light at the end of the tunnel is no longer a faint speck of light, but a glowing orb of sunshine,” said Wells Fargo economist Scott Anderson.
However, economists say two major threats still loom: deflation while the recession lingers and inflation once the recovery begins. Even if the economy manages to rise from its current morass, it could be brought down again if prices continue to fall – or if they bounce back too sharply.
To some economists, the chief threat is deflation, a decline in prices and incomes that could pull the rest of the economy into a downward spiral.

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