Hi CB,
Long time, no see... Hope all is well with you and yours...
Aha! The infamous "D" word... Yes, it's there in the post I'm responding to...
online.wsj.com
Deflation Makes a Comeback As Economy Keeps Sputtering
By JON E. HILSENRATH and LUCINDA HARPER
Staff Reporters of THE WALL STREET JOURNAL
The good news is that the price of everything from golf clubs to personal computers is falling.
The bad news is that the falling prices could cost many people their jobs.
The combination of a weak economy and brutal world-wide competition is making the American economy look more and more like a bargain basement. About 30% of the hundreds of categories measured by the Consumer Price Index experienced falling prices in June from a year earlier, according to an analysis by Economy.com (www.economy.com), an economic-research firm. Prices fell in a wide array of sectors, from television sets to silverware to cellular-telephone service. The overall index still rose, but the 1% year-over-year increases for much of 2002 were the smallest such gains since 1965. The overall index hasn't seen a year-over-year decline since a brief dip in 1955, while the last extended decline was in the Great Depression in the 1930s.
In the June report, clothing prices fell 2.7% from a year earlier because of cheap imports from places like China and Bangladesh. The result: An average dress costs about as much today as it did in 1984, even though overall prices have risen 73% in that period. Prices of men's shirts, meanwhile, are nearly 7% cheaper than they were a year ago.
For many consumers, such deflation is welcome news. Indeed, shoppers are benefiting from lower prices on a variety of goods and services. PC prices tumbled 28.9%, in part because of world-wide overcapacity and slumping demand for high-tech products. Even wine prices edged down 0.2% as imported wines from Australia, New Zealand and Chile flooded into the U.S. market.
But if deflation spreads into other segments of the economy, it could turn into a major problem. Both the Great Depression of the 1930s and Japan's economic slump since 1990 were accompanied by severe and widespread deflation. Falling prices savaged corporate profits, forcing companies to fire workers and squeeze salaries. In the case of Japan, sharply falling real-estate prices have crippled the banking system and hurt household confidence and consumer spending.
No mainstream economists are predicting a replay of the 1930s. Still, "one man's bargain is another man's pain," says Paul McCulley , an economist with the giant California bond-fund manager, Pacific Investment Management Co., best-known as Pimco. "The risk [of deflation] is real," he says.
That risk would become more real if frothy home prices in the U.S. began falling. Indeed, some economists and real-estate experts worry that housing prices have risen too fast and could fall.
The other key to watch in the U.S. is the gargantuan service industry. So far, prices here are largely continuing to climb.
The cost of hospital service, for example, shot up 7.8% during the past year because of surging demand for medical services. Education costs, meanwhile, rose 5.9%. Like many service sectors, education is hardly affected by global competition -- if Harvard raises prices, people don't send their kids to school in Bangladesh.
"When education costs and hospital costs start falling -- then talk to me about deflation," says James Smith, professor at the Kenan-Flagler school of business at the University of North Carolina, Chapel Hill.
Mix of Increases and Decreases
The result of this dichotomy between the service sector and the goods sector is that many households are living through an odd mix of price increases and decreases. New-car prices, after adjustments for improvements in quality, are as low today as they were in 1994, thanks in part to 0% finance deals. But the cost of insuring that new car is up 7% from a year ago.
Television prices have collapsed, but hook your new flat screen up to cable TV, and the service will cost 5% more today than it did a year earlier. Prices for sporting goods are down, but if you want to attend a sporting event you've had to fork over 6% more each year for the past three years running. And that's before you have to shell out $6 for a cup of stale beer.
Not all service-sector prices are rising. Air fares, hotel rates, car-rental rates and cellular telephone service are all experiencing drops. The latest round of price-cutting erupted last week, when the major airlines announced business-fare discounts in an attempt to lure back high-end travelers. Delta Air Lines is cutting some roundtrip overseas routes by as much as $6,000. Trans-Atlantic trips on the Concorde have been cut by more than $3,000.
Fears of an American spell of deflation first emerged late last year when the Consumer Price Index briefly dipped. Those fears dissipated as an economic recovery appeared to take hold. Now, as the recovery falters and stock-market prices swoon, deflation worries are creeping back. One of the recent bestsellers at Barnes & Noble and Amazon.com, for instance, is a gloom-and-doom book called, "Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression."
Workers in industries beset by falling prices already are feeling the pain. Erin Nelson, a Galesburg, Ill., employee at a Maytag refrigerator plant, experienced the downsides of deflation first hand when she was laid off in early August.
This is normally peak season at the plant, but the company just laid off 300 workers in a continuing effort to cut costs. One of Maytag's problems: falling prices. Appliance prices have fallen at a 1.7% annual rate during the past three years, leaving Maytag quick at the trigger when it sees signs of waning demand. Ms. Nelson, who has two children ages 13 and 15 and a fiance who was laid off too, says she is going to start looking for a job in the health-care sector, where there are more opportunities and prices happen to be rising.
In the meantime, however, she says, "I won't be going out and shopping."
'Til the Cows Come Home'
For some sectors, falling prices seem unrelenting. Car prices declined 0.8% because of reluctant consumers and intense competition from foreign auto makers. "We're planning for 1% deflation [in cars prices] til the cows come home," says Will Shearin, an economist with DaimlerChrysler in Detroit. The auto makers have responded not just by cutting jobs, but also by scaling back 401(k) contributions.
In the sporting-goods sector, prices are down 2.5% from a year ago, and they have fallen by 3.2% on average for the past three years. Callaway Golf in July announced it would sell its Big Bertha ERC II titanium driver for $399 and said it would toss in a dozen of its HX golf balls with the deal. That driver price is down from $499 a year ago.
Callaway's Chief Executive Ron Drapeau has complained to investors about "irrational pricing" by his competitors.
While such price pressures bedevil manufacturers, most consumers aren't complaining. Gary and Rebecca Walker, a Virginia couple, have been loading up on $12 Ralph Lauren ties and cheap linens to take advantage of the deals. "We have bought things we really don't need just because the prices are good," Mrs. Walker says.
Write to Jon E. Hilsenrath at jon.hilsenrath@wsj.com
Updated August 13, 2002
KJC |
