Global Deflation Pandemic Begins to Brew

--global delfation is still unfolding, in contrast to surge in energy prices. By SCOTT PATTERSON In congressional testimony this week, Federal Reserve Chairman Ben Bernanke gave no indication that he planned to turn off the central bank's liquidity spigots anytime soon. Critics howled that the Fed is risking runaway inflation. More immediately, however, the threat of deflation seems a bigger concern -- not just in the U.S., but also in economies around the world. Last week, World Bank Chief Economist Justin Lin warned in a speech that a surge in excess capacity world-wide could lead to a global "deflationary downward spiral." The Bank of Japan and the International Monetary Fund are forecasting two years of price declines in Japan, which suffered a serious bout of deflation in the 1990s because of a blowup in its banking sector and collapse in the real-estate market. Recent data show that prices still are falling in fast-growing economies such as India and China. In the first half of the year, China's consumer-price index was down 1.1% from a year ago, and its producer-price index fell 5.9%, according to China's National Bureau of Statistics from last week. In India, prices have been slipping into negative territory for more than a month. Broadly, prices in Europe are tipping into a deflationary dead zone. In the 16-nation euro region, prices fell 0.1% in June from last year, the first such drop on record. Prices have been flat or down in Finland, Portugal, France, Germany, Ireland, Spain and Switzerland, according to Moody's Economy.com. There are a few caveats. Recent deflation data in part reflect the comparison with sky-high energy prices last year. And oil prices could spike again. Ironically, that could potentially hurt companies' pricing power by taking spare cash out of struggling consumers' pockets. But if deflation does take root, it could prove devastating for investors. Deflation can cause stock prices to decline as companies are unable to boost prices; corporate bonds also suffer from rising bankruptcies. Behind a global deflation virus is a collapse of demand in the U.S. Unless the economic engine in the U.S. can get cranking again, deflation could keep spreading. Email: tape@wsj.com