Watch Out For Falling Prices

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Watch out for falling prices.

Well, there it is: ten months and six Fed interest rate cuts into this slowdown, inflation is nowhere in sight. Friday, the Labor Department reported that the PPI — the Producer Price Index, which measures commodities prices — fell 0.9 percent in July, its biggest decline since August 1993 and a whole lot more than the 0.3 percent forecasters had settled on. (Those guys seem to be wrong an awful lot lately, donít they? Maybe somebody should sue.)

The good news is that Alan Greenspan, if heís so inclined, should have absolutely no reservations about cutting short-term interest rates August 21 when the Fed meets again, and his seventh cut of the year should bring the Fed funds rate down another quarter-point notch to 3.5 percent, or — if he wants to scare us — 3.25 percent. The bad news — and this is the least certain, mind you, of the bad news we got this week — is that some folks are starting to make noises aboutÖ DEFLATION.

But before we go there, a word about producer prices. These are the prices of the stuff that manufacturers, processors and other value-adders pass on to retailers. (Retailers then add their own value (stores, sales help, etc.), at which point the Producer Price Index becomes the Consumer Price Index, which measures what we pay for the stuff.) In other words, the PPI is mostly about manufacturing, as well as basic stuff like food and energy — itís supposed to spot inflation before it hits the stores.

Inflation is technically the Fedís chief enemy, but at a time when the worldís economies are in various states of slumber, from the U.S.í hangover to Europeís lethargy to Japanís coma, deflation is its worst nightmare. Deflation happens when people simply refuse to buy stuff, and any money that gets put into the economy by the central bank just sits there, unborrowed, uninvested, unspent. And thereís almost nothing a Greenspan can do about it, except wait. (Hey — he's fine. He invested in Treasurys in 2000 and beat the Street by a mile.)

And while that scenario of central-banker impotence does bear some resemblance (for now) to our current situation — six interest-rate cuts, and this week the Fedís own Beige Book had it that the recessionary woes that have long afflicted the manufacturing sector began in June and July to spread elsewhere — itís not the smart bet yet. Because while the drop in the July PPI was dominated by a 5.3-percent decline in the crude goods portion of the report — and that was in turn dominated by falling energy prices, namely a 17.7-percent drop in gasoline prices, the biggest one-month rate of decrease in 15 years. The "core" rate, which excludes those volatile food and energy numbers, was actually up 0.2 percent for the month.

And falling energy prices are the best kind to have. Much as the prospect of rising pump prices earlier in the summer had economists worried about a "virtual tax," psychologically and otherwise, on producers and consumers alike, the reality of precipitously falling energy prices means that consumers will feel richer and manufacturers, well, at least cheaper fuel doesnít make that woebegone sectorís predicament any worse.

Itís been somewhat of a rough week. Thursdayís sales announcements from retailers indicated a mass migration from Macyís to WalMart (hence the slogan-borrowing above) as consumers showed signs of getting stingy with their money. And although productivity reclaimed its former glory Tuesday with a 2.5 percent hike after a contraction in the first quarter, that was mostly because producing companies got around to firing all the workers that were still manning halted production lines back in March.

A GM executive complained that the strong dollar was killing manufacturing (duh — but the alternative, in which the U.S. economy is weaker than everybody elseís, doesnít seem to be preferable). And that no-good-news Beige Book report Wednesday pretty much killed off Wall Street for the rest of the week.

Well, that and the stifling New York City heat.

But unemployment claims, reported Thursday, may be leveling off, and the August-centered effect of those magical tax rebate checks hasnít had a chance to show up on the radar screen. And GMís other utterance this week — about their success with free-standing stationery hydrogen fuel cells — suddenly got people thinking about a smog-less, grid-less energy future. Or at least a promising new thing for manufacturing to manufacture.

So has the Fed done enough? Is it just a matter of time? Or are we slowly slipping, slipping, slipping into a future of low low prices, flat flat stock prices and recalcitrance in both the business and consumer sectors?

Only your bioethicist or religious leader knows for sure.