TAKING THE AIR OUT

Food inflation may fall to no more than 4.5 percent in 2009 as lower dairy costs give consumers relief from this year’s price gains, the highest in almost three decades, the U.S. Department of Agriculture said.
(Bloomberg News)

Combined with the crash in crude oil and gasoline prices, this deflation should function as a huge tax cut to consumers and many businesses as far as lower input costs. With that said, we need to recognize that runaway deflation can be catastrophic if not under control--and is far worse than inflation--. Also, this commodity tax cut cannot be said to offset the rising unemployment or rising foreclosures in quite the way the bulls want it to.

BOTTOM LINE: A food and energy tax cut is just what the doctor ordered for the American consumer and the struggling American business, but the medicine may indeed kill the patient if we cannot control deflation over the coming quarters. Sooner or later--if it hasn't already--crashing commodity prices will freak people out instead of offering a breather.