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Prices decline deflation fears Original Source Link: (May no longer be active)
http://www.boston.com/dailyglobe2/165/business/Producer_prices_decline_renews_fears_of_deflation+.shtmlhttp://www.boston.com/dailyglobe2/165/business/Producer_prices_decline_renews_fears_of_deflation+.shtml
Producer prices decline renews fears of deflation
By Associated Press, 6/14/2003
WASHINGTON - The threat of national deflation, an economically dangerous long-term slide in prices, rose anew yesterday with a second monthly decline in wholesale costs.
Compounding those concerns about the economy, a University of Michigan report indicated a sharp drop in consumer sentiment.
The Federal Reserve is expected to shave interest rates this month to guard against the possibility of the recovery foundering.
The Labor Department reported yesterday 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 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 other goods, including clothing and trucks, also fell.
''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 recent 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. While the country experienced limited bouts of falling prices at the end of the 1940s and in the mid-1950s, the United States' last serious case of deflation was during the Depression.
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.
''The issue we're concerned about is not deflation in the sense of falling prices per se, but the issue of what I would call corrosive deflation,'' Greenspan said last week.
Also yesterday, Michigan's widely watched index of consumer sentiment fell to 87.2 in mid-June, from May's reading of 92.1, Dow Jones Newswires reported. The reading was far below the level of 93 that market watchers had been expecting.
On Wall Street, stocks fell. The Dow Jones industrial average lost 79.43 points to close at 9,117.12.
Friday's PPI report reinforced economists' belief that the Fed will cut short-term interest rates, now at a 41-year low of 1.25 percent, by at least a quarter of a percentage point at its next meeting June 24-25 in a bid to energize the economy and help ward off even the threat of a deflation outbreak.
The Fed ''has much latitude to buy insurance for recovery by easing - and at the same time add to Mr. Greenspan's firebreak against deflation,'' said Maury Harris, chief economist at UBS Investment Research.
Economists view deflation as a far more serious threat than inflation because the Fed's primary tool for boosting economic activity, reducing interest rates, might have only a limited impact on the psyche of consumers and businesses once a deflationary spiral takes hold.
This story ran on page C2 of the Boston Globe on 6/14/2003.
© Copyright 2003 Globe Newspaper Company.
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