Deflation warning bells ring louder

[Mr. Hyde]

Consumer prices may fall on an annual basis for the first time in more than 50 years. Is this the beginning of a deflationary spiral or just a blip?

NEW YORK (CNNMoney.com) -- Prices are falling for just about everything these days.

The government will report its key inflation index Friday morning, the Consumer Price Index, and economists believe the report is likely to show the first year-over-year drop in prices since 1955.

But while shoppers might see that as good news, economists generally view this as a threat to an already struggling economy.

That's because deflation, or a widespread drop in prices, is one of the most destructive forces that can hit an economy.

Lower prices are one way businesses respond to the lack of demand for their products in a slowdown. But if companies can't make a profit selling their products at the lower price, they'll respond by cutting production and laying off more people.
More job losses can cut even further into demand. But even if consumers have jobs and money, they're likely to hold off on purchases if they come to believe that prices will head even lower. All of which adds up to even more weakness in the economy.

Deflation is most often associated with the Great Depression. In 1930, consumer prices fell 2.3% and plunged 9% a year later. Prices fell nearly 10% in 1932 before the rate of decline started to slow. Still, prices didn't turn higher again until 1934.

The U.S. is nowhere close to that type of deflationary spiral just yet. Economists forecast that the year-over-year drop in January was just 0.1%

Much of that decline has been driven by lower gas prices. But there is clear evidence that falling prices are spreading beyond the pump. The core CPI, which strips out food and energy prices, fell at a compounded annual rate of 0.3% in the fourth quarter of 2008.

http://money.cnn.com/2009/02/19/news/economy/deflation/index.htm?cnn=yes

[Trajan]

1. I expect deflation because I do not expect wage increases ....

IF one adhered to the maxims of 'Supply, Demand, and Price', then something has to give ...

It is obvious that workers do not make enough to purchase the goods that manufacturers produce, and that a decade of a 2nd mortgage-refinancing frenzy had masked the inadequacies of wage levels by providing cheap credit instead of a healthy income for making purchases ...

Well ... The easy credit is gone, and low wages cannot support the purchase of expensive goods ...

IF wages do not increase, then prices will decrease .... and dont expect wages to grow anytime soon ...

Wages are stimulus .... They are the best stimulus ... Yet the righties hate paying workers a decent wage for their labor ....

Well THAT bird has come home to roost, hasnt it ? ....

[Mr. Hyde]

5. I think NAFTA is catching up with us.

There are too many people competing for too few jobs. This has skewed the supply and demand relationship in favor of employers who have responded predictably, by lowering wages. I have been screaming about this since 1996. I voted for Perot because of it. The damage is done now and there's probably no undoing it.

[Xipe Totec]

2. The false profits of inflated dollars

So, according to economists, profits come from currency inflation...

:crazy:

[Andy823]

3. Last year

Prices went way up and it was blamed on the cost of fuel. Fuel prices have gone down, yet prices remained high. Now with so many people losing jobs, and many lost some 40% or more of their savings, price have to drop or nobody will be able to buy the products. When many things we buy are made overseas with salve labor, and then shipped back here and sold at high prices, the corporations were making a killing on their profits. Now they will have to take a cut in their "outrageous" profits that they have made during the Bush years, and settle for a say 5 billion in profits instead of say 10 billions! CEO's of big corporations are now mutlit millionaires, or in some case's billionaires. They can take a cut in pay!

[ThomWV]

4. Sure, you'll see deflation in the price of plastic junk, but not food or energy

And so the growing number of newly poor will still pay through the nose to feed themselves and to stay warm in winter.

On Edit: and while I'm at it. The layoffs will be in China. The people of this country who mistook credit for debt never did have any money in the first place to pay for their bobbles - it was all debt. And so now that they are faced with having to actually come up with money to pay for things we see sales plummet.

[Mr. Hyde]

7. I can't remember when milk was last $2/gallon but that's what I'm paying for it now.

We'll see what happens this summer.

[NEOhiodemocrat]

11. I noticed that lately also

even had chocolate milk for $2.24, regular for $1.99, butter for $1.49. Of course the cost of meat is skyhigh.

[Statistical]

9. There is a danger of widescale deflation.

As economic activity slows, prices slow with them.
We have seen it in every major deflation both in US and abroad.

Deflation can sometimes be far worse than inflation.
As consumers buy less (even food) one company will step in to cut prices and gain marketshare.

Without RISING WAGES to stop the cycle another company steps in lowers its prices but due to unemployment reduced buying power (from lack of cheap credit), falling wages, lost bonuses, etc consumers still buy less.

Now I am not saying people will starve but they may choose generic over name brand. They may skip desert. They may eat more potatoes and less meat.

So whats the bad news?
Lower prices are great right. Well not completely. Eventually the lower prices affect the company selling and they are selling less than production cost. So they cut costs by reducing quality, firing workforce, and lowering produciton runs.

Well all those reduces available buying power and the cycle goes lower and lower and lower.

At one point in Great Depression Dairy farmers drove their milk into the city and poured it down the drain to show they wouldn't sell milk at less than production cost.

Prices didn't stabalize until Fed put subsidies in place.

[RUMMYisFROSTED]

6. Up .4

At least that's what I thought I saw this morning.

[Mr. Hyde]

8. First time in 4 months.

[RUMMYisFROSTED]

10. I noted it because I found myself happy to see some inflation.

Strange days.