Home prices crashed first. Now gas prices are dropping about 10 cents a week in Arizona.
Will price slashing soon begin in other areas of the economy? While lower prices are good news to consumers, economists freak out over deflation.
That’s because deflation often becomes a difficult-to-defeat phenomenon that crushes finance and industry alike, reports The New York Times. After all, manufacturers can’t make a living if products must be sold for less than the cost of making them. Then the layoffs begin.
Explains the Times:
The danger of this is the difficulty of a cure. Policy makers can generally choke off inflation by raising interest rates, dampening economic activity and reducing demand for goods. But as Japan discovered, an economy may remain ensnared by deflation for many years, even when interest rates are dropped to zero: falling prices make companies reluctant to invest even when credit is free.
Making matters worse is the global nature of the coming recession:
Not since the Depression have so many countries faced so much trouble at once. The financial crisis has gone global, like a virus mutating in the face of every experimental cure. From South Korea to Iceland to Brazil, the pandemic has spread, bringing with it a tightening of credit that has starved even healthy companies of finance.
Of course, when I go out to buy groceries, I still see little signs of lower prices. In fact, everything is MORE expensive. I laugh at Whole Foods trying to sell 15-pound watermelons for $1.50 a pound!
The price of healthful foods is up 19.5 percent over the last two years, reports The New York Times on recent study. (This article chronicles a couple who try to eat on $1 a month.)
As a result, sales of organic and natural products are slowing, reports another New York Times article:
It turns out that when times are tough, consumers may be less interested in what type of feed a cow ate before it got chopped up for dinner, or whether carrots were grown without chemical fertilizers — particularly if those products cost twice as much as the conventional stuff.
I think Americans still care about what’s in their food, but if they’re about to lose their homes, car and/or jobs, how can they justify luxury food prices? Although I love Whole Foods, I think the company has serious trouble coming if its meat, fish and produce prices don’t come down before Americans forever associate the stores with exorbitant prices.
Besides, stores like Safeway and Wal-Mart are increasingly selling affordable, pseudo-organic products grown in South American countries. Shoppers are noticing.
In the long term, though, stores like Whole Foods are just as likely to join the deflationary movement out of the need to survive. Even Trader Joe’s may have to cut prices soon as out-of-work Americans cut back on shopping.
Think I’m being overly dramatic? I’ve already heard stories (from my wife) about shoppers using their paychecks to buy groceries. Google News is filling up with stories of food banks worried about the coming winter, reports The Eugene Register-Guard:
Outside a grocery store in west Eugene, half-empty shopping carts tell stories of stretched budgets and empty wallets:
A mother of eight who can’t keep the fridge full.
An aging senior who winces at the price of meat and goes without. …
Nearly 300 new families a month are seeking help, with nearly one-in-five households using the food stamp program.
In north Texas, donations to a food bank increased 17 percent after a fundraising campaign. But it’s not enough to meet demand, reports The Dallas Morning News:
Kathy Wilson started going to the food pantry a few months ago. She said her paychecks at Luby’s cafeteria haven’t kept up with the cost of living.
“Everything’s going up,” she said. “It’s really hard out there.”
Despite high-priced food, one of the leading indicators of deflation is going-out-of-business sales. On Friday, I noticed that Linens ’n Things was having a going out of business sale. Circuit City plans to cut 155 stores, while RadioShack has been shutting about 30-40 stores a quarter, reports Bloomberg.
In the meantime, the U.S. government continues to throw cash in the wrong direction. Saving the financial system does not seem to help average families make ends meet.
Rather than spending more than a trillion dollars bailing out banks, wouldn’t it make more sense to spend the money fixing roads while building wind farms, mass transit and solar farms? That would put the money in the hands of people who are losing their jobs and quickly circulate cash in the real economy. It might even prevent a price freefall.
Despite the Libertarian and Republican dislike of the Roosevelt’s post Depression policies, they worked for a simple reason: investment in real things is the most sustainable form of economic growth that exists.
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