Lower Prices:

Good News, Bad News

1% drop in month may entice some shoppers with discounts, but it signals overall declining business for retailers, industry

November 20, 2008|By Hanah Cho | Hanah Cho,hanah.cho@baltsun.com

When prices fall for clothes, gasoline and other goods and services, it's good news for consumers who are facing increasing financial pressure in an ailing economy.

Consumer prices fell by 1 percent last month compared with September, mostly because of plunging energy prices, according to federal data released yesterday. It was the largest single-month drop in the 61-year history of the consumer price index, highlighting the cost cuts that retailers and others are making in hopes of calming jittery shoppers.

But some see the price declines as the latest troubling sign for the economy.

While costs for most things, including energy and food, are higher than they were a year ago, some economists are worried that continued price declines would worsen the slowdown by pressuring businesses to cut even more because of weak demand. Still, most analysts cautioned that the United States has not seen a prolonged period of deflation since the Depression.

"It's one more sign of everything else we've been seeing, in that asset deflation, such as falling home prices, is spreading into the goods and services economy," said Charles W. McMillion, chief economist of MBG Information Services in Washington.

"It's unlikely we'll have an overall deflation for an extended period of time. [But] if you're in the retail business, deflation is here. If you're in the real estate business, deflation is here. If you have a car dealership, deflation is here. It depends on where you sit," McMillion said.

Separately, the Federal Reserve lowered yesterday its forecast for economic activity this year and next because of the financial crisis. And a new report by the Commerce Department showed that new home construction dipped 4.5 percent in October to 791,000 units, the lowest level in nearly 50 years.

Such dismal economic indicators and increasing worries about the auto industry caused the Dow Jones industrial average to fall yesterday below the 8,000 mark, a level not seen since 2003. The Dow fell nearly 430 points, or 5 percent, to 7,997. Other major indexes declined at least 6 percent.

Excluding fluctuating energy and food costs, prices fell 0.1 percent last month, the first monthly decline in core prices in 26 years, according to the Labor Department.

"When the economy is strong, inflation is higher," said Richard Clinch, director of economic development at the University of Baltimore's Jacob France Institute. "When the economy falls, prices grow less rapidly."

Energy prices sank 8.6 percent last month as consumers saw relief at the gas pump. Marylanders are paying just under $2 a gallon today after paying more than $4 a gallon at the peak of the market last summer.

Consumers are also paying 5.4 percent less for transportation and 1 percent less for apparel as retailers began slashing prices for the holiday season earlier than usual.

Food and beverage prices overall rose 0.3 percent last month, half of the increase in September. But items such as fruits and vegetables declined 2.2 percent in October, and dairy products fell 1 percent.

Still, some businesses have yet to experience the benefits of recent price declines. For the past 12 months, consumer prices overall are up 3.7 percent, while food and beverage prices are up 6.1 percent.

"The irony is that even though fuel prices are coming down, electricity and fuel charges are still going up," said Chris Maler, co-owner of Matthew's Pizza in Baltimore.

Maler said he has asked his trash and waste management vendors to lower or eliminate fuel surcharges as gasoline prices have plummeted. So far, he has not received a response.

Moreover, Maler said he's paying more for flour and cheese since the beginning of the year, though prices recently declined slightly or flattened. It costs more than $5 for a pound of cheese, compared with $3.47 at the beginning of the year. And Maler pays about $20 for 50 pounds of flour, up from $18 but down from a peak of $29.

After trying to keep from passing cost increases on to customers, Maler raised prices on pizza and salad items in October.

"If the economy stays in this situation, there is a thought of increasing prices at the first of the year, which we don't want to do," Maler said. "We've been here 65 years, and we have a following and we want to continue to provide quality and service at a value to our customers."

Last month's falling consumer prices reflected deep discounts among retailers, who are fighting for cash-strapped consumers. They are pushing holiday promotions earlier than ever in what is expected to be a bleak season.

Retailers are expected to cut prices more to lure shoppers, but economists worry that consumers will hold off on making purchases to wait for further price drops, eroding demand even more.

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