Virginina Postrel in the New York Times: When the price of toys falls because Chinese suppliers make them cheaply, or the price of computer chips falls because of new designs or the price of manicures falls because there is a nail salon on every corner, that is not deflation. These are changes in relative prices, not the overall price level...
Analysts who respond to questions about inflation and deflation with talk about the “pricing power” of businesses are confusing real and nominal prices. Not being able to charge more because the value of your products isn’t rising relative to other goods is different from not being able to charge more because the value of each dollar, regardless of how it is spent, is rising. Only the latter is deflation....
If anything, trends are moving in the opposite direction. The falling dollar raises the cost of goods, while the growing federal deficit creates inflationary pressures...
‘”I’ve never known an economy — I doubt that there is one — that has a falling exchange rate and a large and rising deficit and that has deflation,” said Allan Meltzer.’
