Some observers see a strong possibility of mild deflation developing in 2003 because of a sluggish economy, weak employment growth, and high levels of consumer debt. The combination of these factors could lead to modest price declines in 2003.
However, mild deflation alone has not been a negative for either the stock or bond markets. The last time that the year-over-year rate of change for the Consumer Price Index (CPI) ended down was in 1954, when it fell by -0.7 percent. The result: stocks rose by 53 percent in 1954 and a further 32 percent in 1955.
Serious deflation may cripple stocks, which happened in the early 1930s, but mild deflation will not necessarily prevent stocks from rising.
