Forget inflation: Is deflation the real threat?
By John Waggoner, USA TODAY
Updated 17h 35m ago Comments
But a growing number of economists and money managers are starting to worry about the opposite of inflation: deflation, a period of falling prices and declining incomes.
Sure, the government’s consumer price index has gained 3.5% the past 12 months. Even stripping out food and energy, the CPI is up 2.1%, the Bureau of Labor Statistics says. And anyone who lives in the real world knows you can’t live without food and energy.
But other prices have been moving relentlessly downward, from refrigerators to stocks to houses and salaries. Economist A. Gary Shilling argues that many of the factors for deflation are already in place, and that people overlook falling prices because they are so focused on the items they use the most.
In the meantime, everyone’s looking for lower prices, either from one of dozens of deal sites, such as LivingSocial and Groupon, to low-price specialists such as Walmart, Target and Costco. “We have become obsessive to chase the lowest low prices,” says Marian Salzman, trend-spotter and CEO of Euro RSCG Worldwide.
That’s a deflationary attitude — something policymakers fear. In deflationary periods, consumers put off purchases as long as possible, believing that prices will get lower. Fewer purchases mean lower economic activity — which, in turn, leads to lower salaries and higher unemployment. While deflation doesn’t necessarily mean another Great Depression, climbing out from a deflationary pit is tough — arguably, tougher than whipping inflation.