Price drops raise deflation worries

People shop inside Macy's next to holiday decorations in New York City.

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Kai Ryssdal: These are unusual economic times. There's something new, it seems, every day, or at least, something we haven't seen in a long, long, time. Thanks to the falling price of oil, last month consumer prices took their biggest tumble since 1947.

For us, falling prices may sound like a silver lining in the economic slowdown, but the drop has central bankers, corporate executives and academic economists worried about deflation. If you wonder why that's a bad thing, and nobody blames you, here's your clue: The last time we saw a real deflationary spiral, Herbert Hoover was in the White House.

From Washington, Marketplace's Steve Henn reports.


Steve Henn: Consumer Prices dropped more last month than at any point in the past 61 years.

Mark Zandy: Consumers are under severe financial pressure.

Mark Zandy's an economist at Moody's.

Zandy: People are very nervous for lots of different reasons, and that's going to weigh on the economy for a considerable period of time.

Consumers simply are not buying stuff fast enough to keep prices stable. Today, the vice chairman of the Federal Reserve, Donald Kohn, said the risk of deflation or continually falling prices is increasing.

Donald Kohn: Whatever I thought that risk was four or five months ago, I think it's bigger now, even if it is still small.

In October, consumer prices fell by more than 1 percent. Analysts say that may not sound like much, but it's huge. Even ignoring the falling price of gas and food, Diane Swonk at Mesirow Financial is sure more price cuts are coming.

Diane Swonk: We're going to have deep discounting by retailers out there.

This should be good, right? Not really, says Lyle Gramley, a former Fed governor who's now at the Stanford Group. He says when prices drop month after month, deflation becomes a vicious cycle.

Lyle Gramley: You get into deflation because the economy is weak. And when the economy is weak, employment is falling. And that has a big negative effect on consumer spending.

Which leads to more deflation and more unemployment. All of this comes when it's getting harder for deeply indebted consumers to borrow. Already $860 billion in consumer debt from credit cards to student loans is delinquent or in default.

In Washington, I'm Steve Henn for Marketplace.

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