August 19, 2010 / 6:10 PM / 9 years ago

U.S. ability to avoid deflation hinges on Fed: S&P

NEW YORK (Reuters) - The United States can avoid deflation if the Federal Reserve moves quickly and decisively to expand the money supply, Standard & Poor’s said on Thursday.

The likelihood of a prolonged decline in consumer prices is small, unless there is a double-dip economic recession, the agency said in a report entitled, “How Severe Is The Threat Of Deflation To The U.S.?”

“When you’re down below 1 percent on the core inflation rate, you’re not a long way from deflation — and a double-dip could send us over the edge,” said S&P’s chief economist, David Wyss.

“Our expectation is that the U.S. will skirt deflation, but that the low saving rates in the U.S., still-growing populations, and quick and decisive Federal Reserve moves to expand the money supply can avoid the trap,” the report said.

“However, there is a risk that declining home prices, a weak stock market, and inability of banks to lend money could still cause deflation,” the report said.

S&P said the latest Consumer Price Index paints a picture of very low inflation, but not quite deflation, yet.

The CPI was up just 0.1 percent in July, excluding food and energy items. Food prices edged down 0.1 percent in July and are now up only 0.9 percent from a year earlier after rising sharply in the first quarter, the report said.

Energy prices are now up 5.2 percent from last July. The overall CPI is up 1.2 percent from a year earlier, but the core index is up only 0.9 percent, slightly below the Fed’s comfort zone of 1 percent to 2 percent, S&P said.

Editing by Leslie Adler

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