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Why falling prices aren't necessarily good for us

By Robert Trigaux, Times Business Columnist
In print: Sunday, November 23, 2008

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There's a new danger confronting our economy. Price-savvy consumers and businesses are getting accustomed to waiting — just a little bit longer — before buying stuff because what's cheap today will probably be cheaper tomorrow.

Realtors know best what I'm talking about. Check out the table of area real estate prices at the end of this story. Since 2006, existing homes prices in the Tampa Bay area have dropped like a rock. The current median price here is now lower than it was four years ago. Every indicator and expert say home prices will fall farther.

A home that sold for $222,000 in 2006 can now be had for closer to $160,000 — more than one-quarter off in just two years. That's a pretty good incentive to wait for prices to drop even more.

The same attitude can be found in holiday shoppers. Why buy now when it's almost a sure thing stores will drop prices more and put additional goods on sale in the coming weeks? No wonder retailers have nightmares this year.

In fact, the consumer price index, which tracks price change in basic household goods, had its largest decline since World War II in October.

The result? Huge numbers of buyers are waiting on the sidelines. And that's forcing an already precarious economy to slow even more.

In the language of economics, we are facing the potential threat of "deflation" — when we may be entering a period of recurring declines in overall prices. If deflation does occur in the United States, it will be something most people have not experienced, says Merrill Lynch economist David Rosenberg.

The deflation threat is reinforced by fears of a worsening recession, rising job insecurity, tougher lending standards, and a Dow stock market index that closed for a few days last week at once-unimaginable lows below 8,000.

But what's so wrong with deflation? Surely it's less toxic than the more familiar inflation, when prices for most things are going up faster than your paycheck.

After prices of so many things soared for so long, I'm rather enjoying the promise of store bargains, gas prices dropping under $2 a gallon and crude oil sinking under $50 a barrel. As a homeowner, I'm losing equity as prices drop, and thankfully I'm not trying to sell my house at the moment. But I can reluctantly appreciate buyers who can find more affordable housing.

But my flirting with deflation is misguided. It has a nasty side. If consumers hold back on purchases to await deeper price cuts, a deflationary spiral can arise.

Here's how it works. If consumers don't buy, companies cut back production. That can lead to job losses which lead to less spending. Then it starts anew. It's a spiral that experts warn is hard to break.

One way to fight deflation is to lower interest rates. But rates already are down from 5.25 percent 14 months ago to 1 percent today. If deflation strikes, the Federal Reserve has little room left to cut rates.

Information from the Associated Press was used in this column. Robert Trigaux can be reached at trigaux@sptimes.com.