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Archive for Saturday, June 14, 2003

Price decline spurs deflation concern

Labor Department reports back-to-back decreases in wholesale costs

June 14, 2003

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— The threat of national deflation, an economically dangerous long-term slide in prices, rose anew Friday with a second monthly decline in wholesale costs.

The Federal Reserve is expected to shave interest rates this month to guard against possibly worse problems.

The Labor Department reported Friday that its Producer Price Index, which measures prices before they reach consumers, fell 0.3 percent in May from April. That decline followed a record 1.9 percent plunge in wholesale prices registered from March to April.

A big part of the decline in wholesale prices for both months came from retreating energy prices, which had been stoked in previous months on war tensions. Prices for some other goods, including clothing and trucks, also went down.

"There are many flavors of deflation," said Mark Zandi, chief economist at Economy.com. "A mild case can hurt businesses but usually isn't a problem for consumers. But in a severe case, ... everyone is going to get nailed."

The back-to-back declines in wholesale prices come in the aftermath of warnings by Fed Chairman Alan Greenspan and his colleagues about the possibility of the country facing deflation, which is a widespread and destabilizing fall in prices.

Although Fed policy-makers say the chance of that happening is remote, the Fed still must be alert for deflation because of its potential to wreck the economy, they said.

In a bad case of deflation, prices generally fall for goods, services, stocks and real estate, economists said. Businesses, watching incomes and profits shrivel, lay off workers and cut salaries of those who retain their jobs. Individuals and businesses find it harder to pay off debt. Bankruptcies rise.

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