JOHN CUNNIFF: Watching out for deflation
Copyright c 1998 Nando.net
Copyright c 1998 The Associated Press
NEW YORK (September 20, 1998 00:07 a.m. EDT nandotimes.com) -- You can see it in the faces of farmers as grain prices plunge. You can measure its lessened impact on your wallet by watching the numbers spin more slowly at the gasoline pump.
Signs of deflation, however spotty, are appearing in the U.S. economy.
Commodity prices, basic to the production of a vast variety of consumer products, continue to fall. A major steelmaker has just lowered prices. Computers and electronic products seem to cost less each weak.
Deflation's presence hasn't yet shown up in the Consumer Price Index, which rose 0.2 percent in August, but the Producer Price Index has fallen in eight of the past 10 months through August.
All this doesn't mean the U.S. economy as a whole is deflating. Prices are still rising and the economy continues to grow. But the signs of price weakness could spread, as they have in much of the less developed world.
"Deflationary forces are continuing to emerge" throughout the world, Federal Reserve Chairman Alan Greenspan said last week. And he suggested the process could be moving in the direction of the United States.
In a world in which economies are tied together by trade, deflation can be as contagious as the flu, a scourge that can lead to lower wages and profits, and layoffs and failures. It can undermine securities.
Signs of deflation or inflation, therefore, must be dealt with as illnesses. If inflation is a fever, deflation is a collapse of the economy's blood pressure with all the attendant consequences.
The United States is still in an inflation mode, however slight, but deflation fear is rising. For many months, monetary officials have looked for signs of inflation; they now tilt slightly toward deflation.
Should it envelop the economy, it might force employers to curtail costs, including payrolls, and drop their prices. It might mean fewer jobs and shrunken incomes. Stock prices as a result would suffer.
Price competition might intensify as producers and retailers choose cost-cutting to losing market share, especially to imports. Competition could be deadly in businesses based on commodities, such as iron and oil.
Service industries might do better, especially in areas where demand can be maintained, as among health-care businesses and utilities. Discounters, already winning market share, might become more popular.
Homeowners with variable rate mortgages might be major beneficiaries of deflation, if you measure their well-being on the basis of falling interest rates. Some could lower costs hundreds of dollars a month.
Those with lots of cash or its equivalent would be able to get good buys. Investors in U.S. Treasury bonds also could benefit, in this instance if such securities, considered secure havens, rose in value. The same, however, might not apply to corporate or municipal bond holders.
These are likely events should deflation spread, but even those who might seem to benefit could be hurt as the economy slows.
Employers who cut jobs, for example, might also cut demand for their products. Companies might lower quality or service, spreading the damage. Homeowners could lose jobs, bond holders lose interest income.
Neither widespread inflation nor deflation are certain to develop, but one or the other is a threat, with the odds now leaning toward the latter. In fact, pockets of deflation already can be seen. |
