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Fallout: The Financial Crisis

Are we hitting the point of deflation?

John Dimsdale Jan 16, 2009
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Kai Ryssdal: We haven’t seen an economy like this in decades, as we all know. Today we saw something else we haven’t seen in that long — annual inflation rising at less than 2 percent — the slowest the prices have gone up in 50 years. That should help consumers do what they do best — spend. But there are some downsides to what could be deflation. Marketplace’s John Dimsdale has more.


John Dimsdale: Six months ago economists were worried that soaring gas prices would trigger so much inflation the Fed would have to raise interest rates. But last month gasoline fell by a record 17 percent. Food prices stood still. Inflation has disappeared. The problem now, says economist Nigel Gault with IHS Global Insight, is the threat of deflation.

Nigel Gault: If prices are falling, people have an incentive to delay purchases. If you delay — buy later — you’ll be able to buy it at a more attractive price. Of course at the moment we don’t want to give people more incentives not to buy, because there’s a real lack of demand.

Plus, Gault adds, falling prices mean less profits.

Gault: If you’re a company which is seeing revenue stream actually declining, the prices you can get for your products declining, that makes it far more difficult to service your debts.

Putting pressure on employers to reduce costs by cutting wages or even workers. Deflation’s pernicious effects usually show up first for producers of discretionary luxury goods. Yachts at this week’s Chicago Boat Show, for example, are said to be selling at fire sale prices.

But as long as falling inflation doesn’t tip into deflation, lower prices are generally good. They’re like a tax break for struggling families, and they give the Federal Reserve room to keep interest rates low to encourage lending. There’s no official point at which sustained lower prices become deflation, but economists say you’ll know it’s here when wages start falling, and they haven’t quite yet.

In Washington I’m John Dimsdale for Marketplace.

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