Outside of Asia,deflation is the exception-not the rule.One of those exceptions is Argentina,which is in the midst of a third consecutive year of outright deflation.Another exception could well be the United States.Two reasons come to mind—the first being the impacts of the business cycle.Downside risks to inflation are not arrested when recessions are over.Indeed,policy stimulus or not,deflationary pressures typically intensify well into the first year of economic recovery.Over the past seven business cycles,the chain-weighted GDP price index slowed from an average of 4.4% in the year prior to recession to 2.9% in the year following recession.That means the typical recession has knocked an average of 1.5 percentage points off the US inflation rate .Applying this norm—1.5 percentage points of disinflation –to the current pre—recession trend of 2.3% inflation in the year ending 2001 would produce a 0.8% inflation rate in the year following this downturn.To be sure,this mechanistic rule of thumb simplifies a very complex story and masks a good deal of variability in disinflation cycles of the past.But with the US economy entering this recession with a very low inflation rate,a surprisingly close call with deflation could well be in the cards for the United States at some point over the next couple of years.
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