Big Price Drop Raises Deflation Fears
Big retail price drops, though attractive, could spell trouble in the long term.
Nov. 20, 2008— -- On the surface, pre-Thanksgiving signs for sales discounts, as much as 25, 40, even 50 percent off, mean good news for consumers.
The cost of living is falling faster than at any time since the government started keeping track in 1947.
In just one month, gas is down 14 percent, airfares fell 4.8 percent. The cost of cars and clothing is down, too.
Across the country, major sales discounts are underway and shoppers, looking to spend less this year, are hoping for the best deals.
"This was $158 marked down to $80," one shopper said. "Half off."
For consumers, the upside of big price drops is obvious. But in the long run, there could be a downside.
"It doesn't worry me," said Denise Johns, a shopper. "But, for the economy, it might be bad."
Economists say it could be very bad. They fear deflation, a prolonged stretch of falling prices that can lead to a dangerous domino effect.
"The fear of deflation is a very real fear when an economy is contracting as drastically as we are seeing today," said Diane Swonk, chief economist at Mesirow Financial. "Price cuts across the board; retailers are going out of business literally overnight."
Analysts fear that the companies and stores offering sales discounts to eager consumers will continue to bring in less revenue and be forced to make up the difference elsewhere.
That could mean paying workers less, laying them off or, in the worst case, companies going completely out of business, something akin to the Great Depression or in Japan during the 1990s.
The auto industry is the timeliest example. Car prices have dropped 4 percent in one month at a Sioux City Ford dealership in Iowa.
A brand new Ford Taurus cost $24,000 in October, nearly $1,000 more than today's price..
"If you're in the market for a car, you can absolutely get a good deal," said Erik Hurst, professor of economics at the University of Chicago School of Business. "But if you're an automaker and you're looking to produce a car, you're making less profits, you expect either layoffs or workers' wages are going to fall."
That's why falling prices are a double-edged sword. While they bring relief to consumers, they also bring big, in some cases crippling, pain for retailers.
