Inflation tops the list of worries for many economists, but some say the current slowdown should nip it in the bud. "Recessions cleanse inflation pressures...

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Inflation tops the list of worries for many economists, but some say the current slowdown should nip it in the bud.

“Recessions cleanse inflation pressures out of the economy, and the growing possibility of a longer and deeper recession means that inflation could come down quite significantly at some point,” says Deutsche Bank’s chief U.S. economist, Joseph LaVorgna. He, like a growing number of economists, thinks the United States is in a recession.

Inflation trends are important because spiking prices have a deleterious effect on the economy: They sap consumer budgets and hammer corporate profits.

Indeed, the stock market may not find a bottom until inflation hits its peak, says Gina Martin, economist for Wachovia Securities. During the 1990 to 1991 recession, which was also characterized by weaker housing prices, consumer-price inflation peaked in October, the same month the Standard & Poor’s 500 found a bottom, she says. This time, she is not convinced inflation has peaked.

Deutsche Bank’s LaVorgna is more optimistic. During the past five recessions, he notes that inflation dropped by an average of two-thirds, from the onset of recession to inflation’s trough, despite interest-rate cuts by the Federal Reserve.

He also points to a favorable trend in the biggest cost for businesses: labor. Unit labor costs, which measure how much companies pay for every unit of output, rose just 0.9 percent in the fourth quarter from the previous-year period. With a weakening job market, LaVorgna says U.S. companies should be able to keep a lid on labor costs.

The Fed, in its March 18 statement after cutting the target for its benchmark interest rate, said “uncertainty about the inflation outlook has increased.” But the central bank also said it expects “inflation to moderate in coming quarters” due to flattening prices for energy and other commodities. Prices of oil, gold and other items dropped sharply in mid-March, though they have since rebounded.