If prices do start dropping, relax and enjoy the bargains

Staying Ahead

December 29, 1997|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

FOR PEOPLE who always like to have something to worry about, here's the trendy new worry for 1998. Price deflation. What would happen to businesses, jobs and the stock market if average consumer prices dropped?

The answer: Things could be just fine. Obsessive brooders should exercise their worry beads on something else.

The Consumer Price Index (CPI) falls when enough businesses cut the prices on things they sell or when prices decline sharply for a couple of major items within the index.

The 12-month inflation rate is currently running at 1.8 percent. Prices rose modestly for most goods and services, but energy and automobiles showed declines.

This kind of selective price-cutting goes on all the time without hurting the economy, says Irwin Kellner, president of Kellner Economic Advisers in Port Washington, N.Y.

Think how much less you're paying these days for computers, electronics, tourist airline tickets, bank loans and long-distance telephone calls. And all this time, business profits have soared.

At the wholesale level, deflation is currently upon us. Prices dropped 0.6 percent in the 12 months ending with November, the largest drop since 1987. Yet producers of wholesale goods aren't down in the mouth.

(The 1987 drop in wholesale prices, by the way, came largely from a huge slide in crude oil prices; it neither caused nor resulted from the October stock market crash.)

Sometimes falling prices do indeed squeeze profits -- as when retailers have to cut prices more than originally planned during a slow Christmas selling season.

But generally speaking, businesses can reduce retail prices with no decline in profit margins, if they're also cutting costs -- for example, by buying raw materials at a lower wholesale price.

Value-conscious consumers often flock to lower-priced goods, so profits rise. Rapid sales may lead businesses to hire at a faster pace.

Consumers are indisputably better off when prices fall. They can buy more for every dollar they earn -- and right now, real hourly earnings are rising at the fastest rate since 1978, Kellner says. Americans' fear of deflation was formed by the Great Depression. Consumer prices dropped from 1927 through 1933, and again in 1938 through 1939.

But falling prices were a symptom of that national tragedy, not a cause. The cause was a bad combination of economic policies: a shrinking money supply, restrictive fiscal policies aimed at balancing the budget and import restrictions that caused other countries to retaliate.

Currently, the money supply is rising and global trade is expanding. So depression worries also ought to be put aside.

Going further back into history, prices fell during most of the closing years of the 19th century and the United States didn't suffer a depression then.

Besides, today's price cuts are mainly on goods, not services. This is a service economy, so true deflation will find it harder to take hold.

Under mild deflation, stock prices have historically done just fine, says Steve Leuthold of the Leuthold Group in Minneapolis.

So deflation alone shouldn't spook stock investors today, Leuthold says. The high valuations that stocks currently carry spook him much more.

Pub Date: 12/29/97

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.