By Maxine Shapiro, KERA 90.1 business commentator
Dallas, TX – So here's a word I'm hearing a lot more of lately - deflation - preceded by the words "are we entering into a period of..." I'm Maxine Shapiro with KERA Marketplace Middays.
The simple definition of deflation according to investopedia.com: "The rate at which the general level of prices for goods and services is falling. The opposite of inflation." Stuff keeps getting cheaper. "Hey, what's wrong with that?" you ask. Nothing, if it just means our grocery bill keeps moving lower, or the sweater you've been dying to buy is now affordable. But like the rest of life, nothing stands alone - everything is intertwined with everything else.
Here are a couple of reasons why economists don't like deflation. It hasn't worked in Japan. Second, lower prices mean lower profit margin for businesses, shrinking economic growth, forcing more layoffs. The psychology of the consumer - when prices drop we usually think, if they come down this low, they may go lower and we delay our purchase. As a result, businesses have a harder time making profits. Stock price comes down, wages come down and unemployment rises.
Now before we get too nervous, most local economists do not believe we are heading into deflation - even though for the month of October, the Metroplex saw prices of goods and services decline, for the first time in seven months. An economist for the Federal Reserve Bank of Dallas told the Dallas Business Journal that the decline in prices is an "indication businesses are fighting to hang on to market share." She also sees areas that are on the increase. And paraphrasing economist Bud Weinstein, one month does not make a trend.
But trust me here - everyone will be listening closely this week to Allan Greenspan and other Fed members who will be making various speeches throughout the country. The lowering of short-term interest rates last week and the continued growth in money supply has been more that a slight signal that the Fed wants to stimulate the economy, warding off any early signs of deflation. For the economy, deflation is just as bad as inflation. For KERA Marketplace Middays, I'm Maxine Shapiro.
Marketplace Midday Reports air on KERA 90.1 Monday - Friday at 1:04 p.m. To contact Maxine Shapiro, please send emails to mshapiro@kera.org.