SOMETHING unusual is happening to prices in the US right now: they are falling. The recent sharp decline in petrol prices is part of the story, but there is now growing fear that the Federal Reserve will undershoot its own 2 per cent inflation target, hindering the economic recovery. There's also a small but worrying risk that the US economy could enter a deflationary rut.
At issue are inflation expectations. Economists believe expectations are critical because they shape the decisions that individual shopkeepers make when deciding whether and by how much to raise their prices. Beliefs about inflation create a self-fulfilling prophecy in which today's expected inflation becomes tomorrow's actual...
Keyword added to your list