Everything is on sale. And that’s not a good thing.
Consumer prices in October fell at the fastest pace in more than 60 years, sucked down by the rapidly deteriorating economy. The prices of oil, food, cars, clothing and electronics have all plunged. Home prices and stock prices also are falling.
Reports about holiday shopping suggest that the nationwide fire sale might seem like a boon for consumers. But it’s increasing the risk that the economy could become mired in a dangerous deflationary spiral — a widespread, sustained reduction in prices, something that hasn’t happened since the Great Depression.
Economists say it’s too early to tell whether deflation has set in — and many say the government’s aggressive responses to the credit crunch likely will prevent sustained deflation.
Others aren’t so sure. Nouriel Roubini of New York University predicts that what he calls “stag-deflation” — a recession combined with deflationary forces — will be a big concern in the coming months.
A deflationary spiral can have several causes, such as a glut of goods that forces manufacturers to slash prices. In the current crisis, the bursting of the housing bubble has forced home prices down, pulling down the prices of raw materials, cars and even stocks.
As prices fall, consumers eventually stop spending, either because they are worried about their jobs, or because they figure they can get lower prices later. Companies start laying off workers because lower prices have pushed down — or eliminated — their profits. That, in turn, means even less demand.
Ultimately, higher unemployment and lower demand create a self-reinforcing cycle that further depresses profits, growth, wages and prices.
Already, prices are cracking nationwide. Oil is down about 70 percent from its 2008 high to $46.96 a barrel. Wheat is down about 60 percent from its 2008 high. Home prices are down 21 percent from 2006 highs.
Consumer spending fell 1 percent in October, the biggest decline since September 2001.
