Is Gtowing Economic Growth Despite Falling Prices, Economy Is Growing So far in 1997, producer prices have fallen at an annual rate of 3.4 percent. At the same time, commodity prices have fallen sharply in recent weeks and the price of gold has plunged. All of these signs have led some economists to suggest that we may have entered an era of deflation. Historically, economists have viewed deflation as a greater problem than inflation.
Deflation increases the burden of debt and labor costs while reducing business profits.
Together, these effects raise the risk of a financial collapse that can degenerate into a depression. So far, no economist is predicting a repeat of 1929. Partly this is because many view the factors that have caused producer prices to fall to be temporary. Federal Reserve Chairman Alan Greenspan clearly falls within this camp. In congressional testimony last week, he pointed to a rising dollar, which lowers the cost of imported goods, and changes in the health care industry as two major elements of falling prices which cannot continue indefinitely.