November Prices Sparks New Deflation Concerns
| December 26, 2008 | Posted by Roshawn Watson under Uncategorized |
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A couple of months ago in a post entitled Why Those Dropping Gas Prices May Not Be A Good Thing, we discussed the growing concerns of deflation. Deflation is widespread price declines, which may initially seem like a good problem to many over-stretched consumers. During deflationary periods, dollars become scarce, and the price declines occur to draw out the dollars. A major concern with deflationary markets is stopping the price declines. With decrease sales (due to consumers waiting for bargains) and prices, come decreased business profits, which ultimately translates into decreased jobs. Ultimately, decreased jobs means less demand for the the products, and this is the the bitter cycle that can cripple an economy.
Image Credit: Clan
The real problem is the psychology of deflation. As prices for goods and services continue to fall, businesses and consumers purposefully postpone purchases, and the deflation phenomenon becomes a self-fulfilling prophecy.
The Consumer Price Index (CPI) took a Hit in November
Consumer spending accounts for about 70 percent of our economy, and the dropping CPI suggests that people are not making purchases because prices are continuing to drop. In some cases, it is as stores are almost paying customers to shop. According to the Labor Department, the CPI fell 1.7 percent in November, following a 1 percent drop in October. The decline in sales is believed to be due to fewer people buying cars and to lower-priced gasoline. Over the past 12 months, the CPI is only up 1.1 percent. Overall, the CPI for the last 12 months is only up 1.1 percent, and the fear is that falling prices will be uncontrollable, especially given the fact that the economy is in a deep recession.
Patrick Jackman, an economist with the Bureau of Labor Statistics, recently said that the steep CPI declines in October, November and probably December haven’t been seen since 1932. Of course this is the result of the 1929 stock market crash and subsequent consumer price declines.
Not All Bad News
For example, food prices are continuing to increase; they are up by 6 percent for the past 12 months. Additionally, sales were up 0.3%, which represents a modest increase. These sales occurred across a wide range of goods, including electronics, clothing, sporting goods and furniture.
Our Risk Of Deflation
Two important bellwethers of a deflationary market are plunging house and stock prices. In both cases, we’re there. We have recently seen decreased prices for oil, grains, copper, and other commodities. Home prices have also tanked. Prices for furniture, appliances, tools, and hardware also appear to be declining. Even though deflation does not yet to be an imminent risk according to most economists, most admit concerns of deflation are rising.
During deflationary periods, cash is king. There will be remarkable deals on many things from clothing and stocks to cars and homes. Being out of debt with a fully funded emergency fund can free up that cash flow to build wealth even during tough economic times. Although hoarding is definitely bad, this is great time to focus on fixing YOUR economy so that your family is in a great position to carry forth your dreams and help others realize theirs.
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