The Risk of Deflation

cerns that the United States and other economies could enter a sustained period of deflation, as did Japan in the 1990s and the United States during the Great Depression. Indeed, a popular version of the well-known Phillips curve model of inflation predicts that we are on the cusp of a deflationary spiral in which prices will fall at ever-increasing rates over the next several years. A sizable and persistent deflation would likely worsen already very difficult global economic and financial problems. Macroeconomic forecasters, however, generally view such a dire outcome as highly unlikely. The most recent Survey of Professional Forecasters (SPF) puts only a 1-in-20 chance of core price deflation this year or in 2010. Are we on the brink of years of deflation, or are the professional forecasters right? This Economic Letter examines the risk of deflation in the United States by reviewing the evidence from past episodes of deflation and inflation.