Deflation is here. When will prices fall?

Total prices in the economy may have started dropping in the second quarter, according to data provided by the National Institute of Statistics (INS) interpreted by economist Dan Gherguţ, Head of the National Institute for Opinion Surveys and Marketing (INSOMAR) and former INS Vice President.

“We also have a decline in gross domestic product (GDP) in nominal terms. We are in a disinflation process, which is worse than inflation. If we redo the math, we have a negative deflator, and the volume index is 98.9 percent,” Gherguţ said during The Money Show, broadcast by The Money Channel.

The economist said that the trend could consolidate for the whole of 2009. The GDP deflator is the general level of prices in the economy, which includes the Consumer Price Index - meaning the inflation targeted by the Governor of the National Bank of Romania, Mugur Isărescu - and the prices in industry, construction, or durable goods.

“You cannot have recession without a fall in prices. In the end, this is what recession means, when you have no more demand, so prices must decline. In fact, we should be asking ourselves why they are not dropping sufficiently,” the Chief Economist of ING bank, Nicolae Chideşciuc, said.

The answer given by Ionuţ Dumitru, Chief Economist at Raiffeisen bank, is “monopolistic markets, and economic sectors with cartels dictating prices.”