Low Prices Cause Deflation Worries

Dec 05, 2002
George Anderson

By George Anderson

Sales results from the Thanksgiving weekend pointed out the power of discounting. Low prices are an attractive draw for consumers, but some economists are worried that too much of a good thing could lead the US into a deflationary spiral.

Reuters reports that deflation is a concern to groups such as the Manufacturers Alliance/MAPI. The organization released a report that analyzed economic conditions in 28 industries. Deflation was listed as the chief worry based on the report analysis.

The chief economist of the alliance, Daniel Meckstroth, says, “Essentially, there is a global excess of supply of manufactured goods facing very sluggish world demand. The interaction of excess supply and relatively weak demand is a price-depressing combination,” Meckstroth said in a report that analyzed conditions in 28 industries.

Costs for personal computers has fallen 22 percent, clothing 2.1 percent and new cars 1.1 percent over the past year.

Moderator’s Comment: How big a concern should deflation
be to the consumer goods and retailing industries?

When the Fed went through its rate raising frenzy a few
years back over the concern about inflation hiding in the shadows, we argued
that the increases were unnecessary because increases in productivity made them

Our view remains the same regarding deflation. While we
agree that there is cause for concern about over supply and lack of demand in
a number of industries, the root cause of lower prices can be tied to productivity
gains. According to a report released yesterday by the Labor Department, productivity
(output per hour of work) grew 5.1 percent in the third quarter.
Anderson – Moderator

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