Spring Break
Consumer prices drop record 1 percent in October
Martin Crutsinger - Associated Press
Issue date: 11/19/08 Section: News
The big retreat in consumer prices represented a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control.
Since that time, the economy has been jolted by the most serious financial crisis in seven decades. The U.S. troubles have quickly spread overseas, depressing growth around the world and cutting into demand for oil and other products, a development that has resulted in sharp declines in the price of crude oil and other commodities.
"Consumer price inflation has suddenly screeched into reverse as the recent abrupt slowdown in world economic growth has led to sharp declines in energy costs while very weak domestic demand is putting downward pressure on retail prices," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.
While falling prices especially for such key products as gasoline can provide a break for consumers, analysts said the worry is if price declines become so entrenched that consumers stop buying things, awaiting further price drops. That is one of the problems facing housing as buyers in some markets stay on the fence, expecting home prices to drop further.
The U.S. has not suffered through a prolonged bout of deflation since the Great Depression of the 1930s. But Japan was gripped with a period of deflation during the 1990s and it took a decade for that country to overcome those problems.
"I am worried that the situation in the United States could turn into a deflationary period in this country if trends continue," said Sung Won Sohn, chief economist at the Martin Smith School of Business at California State University. "With economic conditions getting worse and not better, the risk of deflation is there."
Other analysts, however, said they still saw deflation as a remote threat, in large part because they believed the Federal Reserve would use every means at its disposal to combat an actual period of deflation.
Since that time, the economy has been jolted by the most serious financial crisis in seven decades. The U.S. troubles have quickly spread overseas, depressing growth around the world and cutting into demand for oil and other products, a development that has resulted in sharp declines in the price of crude oil and other commodities.
"Consumer price inflation has suddenly screeched into reverse as the recent abrupt slowdown in world economic growth has led to sharp declines in energy costs while very weak domestic demand is putting downward pressure on retail prices," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.
While falling prices especially for such key products as gasoline can provide a break for consumers, analysts said the worry is if price declines become so entrenched that consumers stop buying things, awaiting further price drops. That is one of the problems facing housing as buyers in some markets stay on the fence, expecting home prices to drop further.
The U.S. has not suffered through a prolonged bout of deflation since the Great Depression of the 1930s. But Japan was gripped with a period of deflation during the 1990s and it took a decade for that country to overcome those problems.
"I am worried that the situation in the United States could turn into a deflationary period in this country if trends continue," said Sung Won Sohn, chief economist at the Martin Smith School of Business at California State University. "With economic conditions getting worse and not better, the risk of deflation is there."
Other analysts, however, said they still saw deflation as a remote threat, in large part because they believed the Federal Reserve would use every means at its disposal to combat an actual period of deflation.
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