January 23, 1998

The D-word is cropping up more frequently in financial writings and speeches, most recently of note, Fed Chairman Alan Greenspan's speech in Chicago a week or so ago. To us, the word deflation means a sustained decline in the generalized price level, generally as measured by the consumer price index. But it is obvious when reading various press accounts, that deflation means different things to different people. Many refer to the danger of "asset deflation." And though the term is never precisely defined by the authors, we presume it means a sustained decline in asset values. Insofar as the asset deflation is not accompanied by a decline in consumer prices, this fails our definition of deflation. If the term is used to refer to a change in asset values in relation to other prices, such as goods and services, then the asset deflation people are talking about is nothing more than a change in the relative price of assets. But precision is necessary and important when discussing deflation because it helps identify its possible cause and to develop policies to prevent it.

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