Deflation instead of inflation expected to hit U.S. economy: paper

Special Report:Global Financial Crisis

LOS ANGELES, Feb. 8 (Chinese media) -- After years of

worrying about inflation, some economists fear the opposite could soon happen:

deflation, an extended period of falling prices that indicates the economy is in

a backward spiral, it was reported on Sunday.

As the recession deepens, more and more Americans

have less to spend on food, clothes, gasoline, cars and shelter, the Los Angeles

Times said.

Despite discounts at the store and the car

dealership, a lowering of rents and a near-historic drop in the price of houses,

people just aren't buying much, the paper said.

The net worth of millions of Americans has also

shrunk, it noted.

"This is the kind of downward spiral that worries

policymakers," the paper said.

Economists and politicians alike are divided about

what to do. Taken as a whole, prices in the U.S. economy increased last year,

but only a tiny bit. Inflation registered only 0.1 percent in 2008,the smallest

increase in prices since 1954, according to the paper.

Consumer spending declined in December for a record

sixth straight month and rose 3.6 percent for the year, its lowest annual gain

since 1961. The economy lost 3.6 million jobs since the recession started in

December 2007, said the paper.

"Deflation will become more pervasive as we make our

way through the year," Mark Zandi, chief economist at Moody's Economy.com., was

quoted as saying. "The downturn is intensifying, and businesses are under

increasing pressure to cut prices to maintain some sales."

The fear about this recession rests on the severity

of the real estate crash and credit crunch, which translates into pain for any

homeowner who sank savings into a house only to see property values plummet,

said the paper.

There may even be signs that -- as they did during

and after the Great Depression of the 1930s -- consumers will change the way

they manage money, saving more and spending considerably less, the paper said.

"Although few would argue that this is not a more

conservative and ultimately safer way for American families to live, it could

push deflationary trends in the economy even further," the paper concluded.