Rapid Disinflation???

We will have to wait till tomorrow to know for sure, but there appears to be a quite dramatic rate of disinflation in the US right now:

Declines in the cost of gasoline probably caused U.S. consumer prices to drop for a second month in October, giving Americans extra cash to spend at retailers, according to a survey of economists.

Consumers paid 0.3 percent less for goods and services last month, after prices fell 0.5 percent in September, a Labor Department report Nov. 16 is expected to show. The forecast is the median estimate of economists surveyed by Bloomberg News.

Now we need to follow the course of domestic consumption in order to evaluate the risk that disinflation could turn into outright deflation, something I have always argued was a real and present risk during the downside of this cycle. Certainly the raising cycle is now surely done, and as I have also been saying, the next more in US rates will be down, the only question is when.

Meantime more evidence of disinflationary pressure is coming from China:

Inflation in China, the world's fastest-growing major economy, unexpectedly slowed in October as the cost of food increased at a slower pace.

The consumer price index advanced 1.4 percent from a year earlier after rising 1.5 percent in September, the Beijing-based National Bureau of Statistics said in a statement today. That's less than the 1.6 percent median forecast in a Bloomberg News survey of 16 economists.

Central bank Governor Zhou Xiaochuan, who raised lending rates twice this year partly to slow investment growth, last week said excess manufacturing capacity in some industries is helping contain prices. With a surge in spending on factories and real estate also cooling, the bank may hold off on raising interest rates further until next year.

``If the government does raise interest rates it will be to curb investment rather than because of any worries about inflation,'' said Leslie Khoo, an economist at Forecast Singapore Pte. ``Inflation is likely to remain well behaved.''

Of course, it all depends what you mean by well-behaved in this context. Those (Brad Setser please note) who argue strongly for a sharp rise in the value of the renminbi need to think carefully about what would be the global implications of a Chinese economy which was stuck in some kind of version of a liquidity trap. The present situation may not be an easy one, but some things we could well live without. Sound economics is also about learning to balance comparative risks.