Consumer Prices Are Plummeting! Steepest Drop In History!

The Consumer Price Index, which measures how much Americans spend on consumer goods like groceries, clothing, entertainment and other goods and services, fell by 1 percent in October compared with prices in the previous month, says the NYT. “It was the steepest single-month drop in the 61-year history of the pricing survey.”

You’re thinking, “Good! I can buy more stuff with less money!” This is true, but the problem is that if everyone can buy more stuff with less money — what motivation is there to manufacture more stuff? Ah-ha. Troubling, isn’t it?

From the NYT:

“We’re looking at a pretty deep recession now,” Mr. Behravesh said. “ All of a sudden, any pricing power that companies might have had is gone. You’re going to see discounting like crazy going on. All kinds of sales. You’re going to see all kinds of prices being slashed.”

With consumers pulling back, many analysts are expecting a difficult Christmas shopping season. Retail sales, for example, were down 2.8 percent in October from September, and 4.1 percent from October 2007 as consumers pared their spending.

In Wednesday’s report, even excluding volatile food and energy prices, prices dropped 0.1 percent in October. It was the first such decline in more than two decades and raises the specter of deflation as the economy contracts and demand for goods and services across the board plunges.

“This month it’s more than slowing, it’s outright contraction,” Mr. O’Sullivan said. “And yes, if you extrapolate that, it’s deflation.”

For those of you wondering what deflation is — you can click here for a bleak explanation.

Consumer Prices Fall by Record Amount [NYTimes]
(Photo: Ben Popken )

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  1. laserjobs says:

    I love getting more for my money since we have had such a surge in prices over the last couple of years.

    Deflation is awesome, it purges the crap from the economic system so we can get back to business.

    • ADismalScience says:

      @laserjobs:

      Deflation is NOT awesome. It’s actually the worst case scenario for an economy. Economists would definitely prefer inflation to deflation.

      Of course, this CPI figure was largely driven by energy price collapses. The so-called “Core” CPI, which excludes volatile food and energy prices, was down a very slight amount – 0.1.

      The concern is that this Q3 data is presaging a drastic exacerbation of these conditions in Q4, which would be bad.

  2. tande04 says:

    I still don’t get it.

    I was just googling this actually to try and get an explaination after I read the original article.

    From what I was getting the deflation of the 1930s was a completely different kind that was bad and this kind of deflation can be good or bad.

    “what motivation is there to manufacture more stuff?”
    Wouldn’t it cost me less to manufacture it too? My motivation is that I’m going to be able to sell more of something thats costing me less to produce.

    I wouldn’t get my cost of living increase for the year but if I’m already able to buy more then I would of anyways with the COLI why does it matter?

    Like I said I don’t get it. I was hoping for a consumerist article (and the great posting pool) to explain it to me.

    • PJCS says:

      @tande04: I was perplexed by this too. But I think that’s because you and I have cash to spend, cash that’s becoming more valuable (yay!). The problem is for people and businesses who have debt, debt that’s becoming more onerous (eek!). Oh, and for economies like ours that have come to depend on those with debt (double eek).

      To quote the Economist:
      “A commodity-led fall in inflation ought to be good news for rich economies. It boosts consumers’ real incomes and fattens firms’ profit margins. Yet there is something pernicious about inflation falling too far, too fast. Because falling prices make debt more expensive, indebted households would be more anxious to pay off loans, even as other consumers were benefiting from a boost to their purchasing power. If deflation took hold, the gap in demand left by those fleeing debt would not be filled by cash-rich consumers, who tend to be less free-spending.”
      [www.economist.com]

      Also, more generally, deflation means the Fed can’t lower interest rates to juice the economy, since rates can’t be below zero.

      • tande04 says:

        @PJCS: Yeah, one article I was reading called deflation “a tax on borrowers and on holders of illiquid assets” and inflation “a tax on currency holders and lenders (savers) in favor of borrowers and short term consumption.”

        I still can’t wrap my head around it though. If I have the same amount of money and things cost less don’t I have more money to put toward any debt I have (like in the economist article you posted)? Why is that a bad thing?

        What I’m starting to get is that people who were more likely to spend are going to use the chance to pay off debit and thus have less to spend on “stuff”. People who weren’t likely to spend in the first place (and thus little to no debit) aren’t going to use the extra money to spend on “stuff”, they’re just going to put more in the bank every month. That just seems to assume a lot.

      • RockLobsterNet says:

        @PJCS:
        Think about it this way: if you take out a $100,000 loan with a rate of 5% for one year, you pay back $105,000 in one year. BUT if the inflation rate over this time is 6%, you actually borrowed the equivalent of $106,000 a year from now, but only have to pay back $105,000. The lender actually lost purchasing power.
        Now let’s say there is significant deflation, say 6%. Now you have to pay $105,000 back and the amount you borrow in terms of dollars a year from now is $96000. You’ve now lost $9000.
        With this, you can see why if firms expect high deflation, they’ll be hesitant to take out loans and will produce less. They want to get rid of all their inventory now since it will be worth less tomorrow. To further the problem, their workers will probably not respond well to a decrease in wages. Perhaps farther out there you could decrease wages, but for now it’s a fixed cost. This means that the firm can’t lower their production costs in the short run even though prices are falling. It’s now more expensive to produce, so they don’t want to produce much now.
        On the consumer side, if I have loans and I expect high deflation, I won’t spend as much since I’ll save to I can pay off my now more expensive loan. This will lead to a fall in aggregate demand.
        Now we come to our trade balance. Initially, there will be a surge in exports as American goods become cheaper to foreigners. However, American consumers will not buy as many foreign goods, leading to a decrease in the supply of dollars to the rest of the world and in turn a fall in our exports.

        This is all still somewhat simplified and ignoring several issues, but hopefully it helps explain why deflation can be a problem too.

  3. weakdome says:

    I don’t understand- as consumers, how are we looking at a “tough holiday season”? It sounds to me like we will be (theoretically) able to purchase things at less expensive prices. And we all know, holidays are for buyin’ stuff.

    • HIV 2 Elway says:

      @weakdome: You can get more for your money but an increasing amount of people don’t have the confidence to spend as they unsure as to how much longer they will be employed.
      /over simplified

    • dragonfire81 says:

      @weakdome: Yes but what about people with little money or perhaps not even a job anymore? Prices may be cheap but that only helps so much when you don’t have a lot of money to go around.

      Even with cheap prices, you still have to be careful with your buying.

    • ADismalScience says:

      @weakdome:

      Deflation indicates an overall decrease in the combined consumption and production that make up our economy. It means the boat is getting smaller.

      As for consumers, most finance Christmas on debt. That’s less likely if debt burdens are increasing in value. And since deflation also means that credit creation is at a standstill or retracting, Q3 deflation presages an AWFUL Christmas.

  4. pecan 3.14159265 says:

    Buying things during the holidays is inevitable. You buy the gift, you buy the paper to wrap the gift in…even making gifts require buying supplies. There’s just less buying right now. People will still buy, just not as much.

    • hippybear says:

      @IHaveAFreezeRay: Or… you just have a conversation with your family and friends and let them know that you are no longer participating in the purchase-a-thon known as “the holiday season.”

      I did this with my family over 10 years ago, and my life has been SO much better since then. I don’t even really pay attention to the rat race which is the Christmas retail season any longer. Everyone spends their own money on things they know they want, and nobody is ever stuck with a gift they don’t want or have to return.

      Don’t buy into it. Just because everyone else is buying gifts willy-nilly doesn’t mean you have to join in.

  5. wgrune says:

    I am curious as to how much of this is caused by true economic factors and how much is caused by the “recession watch ’08″ the media has been cramming down our throats for, in some cases, 6 months. I wish I had a time machine to try out this little experiment…

    • AtomicPlayboy says:

      @wgrune: Completely agree.

      Here’s a thought experiment: say you completely ignore the news for 3 months (including Consumerist et al). Would your buying/saving patterns stay the same as they were before your media blackout? Absolutely, unless something actually happened to you during that time, like a layoff or a depression of your own investments’ value.
      As soon as you turn the news back on, you’re inundated with warnings to stop spending, worry about your financial security, etc. because of general trends in the economy which may have no affect on you, ever. At that point you probably do start changing your habits, along with everyone else, which then fulfills the media prophecy. Ugh.

      • SudhamayiKabong says:

        @AtomicPlayboy: Brilliant. Simply brilliant. And I mean that wholeheartedly. I’ve often wondered myself just how much of an impact media has when it comes to helping fulfill prophecies, so to speak.

    • Trai_Dep says:

      @wgrune: When the economy has been run so ineptly the past eight years that vast swaths of it need to be nationalized to forestall global apocalypse, you’d expect the media to instead cover Brittney’s 23rd breakup? Err…

  6. Anonymous says:

    If all deflation is bad then computer OEMs should be having serious trouble considering 20 years ago your average business computer could cost thousands of dollars, while today you can get them for a measly $500. And now with virtulization businesses will be buying fewer server, yet OEMs and hardware manufacturers are embracing it.

    Deflation is bad if the amount of product you are selling is flat or going down. Deflation is fine if the amount of product you are selling goes up. The problem with deflation is certain areas is that a large amount of things sold are stuff people don’t need, or are worthless trash that exists for the sole purpose of making the GDP go up.

    • shepd says:

      @ZaneMagoot:

      The parts have begun costing less not because computer manufacturers are interested in making less profit today than 10 or more years ago, but because of:

      - Economies of scale. Many people own more than one computer today. Parts gets cheaper as more people need them when there is a (relatively) unlimited supply of them, since a decent profit can still be made.
      – Integration. This one is really key. What would take several hundred discrete ICs is now built into a single one.
      – Lower power consumption. Lower power consumption means cheaper design and cheap-ass power supplies.
      – Cheaper/quicker/easier design tools and much more IC manufacturer support. You no longer need a PhD in EE to be able to build a computer. You just need the factory and people willing to put in the effort.

      There’s probably other things too, but profits have stayed pretty decent the whole time, until now, I’m sure. The kind of deflation we’re talking about here only affects profit.

  7. CountryJustice says:

    Crazy sales indeed.

    Recently I lost a bunch of weight and, QED, a couple sizes on my clothing, so I decided to treat myself to some new duds. I hit Old Navy first, as it’s close to my house and I generally like their conservative styles and modest price points. I went armed with my re-usable 30% off coupon and cleaned up nicely. Not only did I get the coupon discount, but many items were marked down 25-50% of the tag price. And if that wasn’t enough, they were handing out $5 gift cards (for next purchase) if you spend $40 or more. Needless to say, I broke up my purchases and made a few $40 visits that day.

    All in all, I scooped up about $300 worth of shirts, pants, and accessories for about $150. Not bad at all.

    Makes me wonder if it’s a sign of things to come.

    • tande04 says:

      @CountryJustice: I was pretty happy with that 30% off coupon too. I thought it was going to be like most sales and it wouldn’t count on sale items or clearance etc. and everything would of been marked up anyways but it wasn’t.

      Should of bought some pants though. Got lots of shirts and sweaters but I didn’t get any pants. Having lost some weight myself (more importantly lost some fat) my pants look ridiculus being held up more by the belt then the waste band.

    • pecan 3.14159265 says:

      @CountryJustice: Share! Where is this fabled magical coupon?

      • tande04 says:

        @IHaveAFreezeRay: If its the same one I was thinking of its over :(

        It was their give and get promotion (a percentage went to a charity you chose) and ran Nov 13-16th.

        • CountryJustice says:

          @tande04: That’s the one. It expired this past weekend. I believe it was also listed as a morning deal here last week (I could be wrong though).

          I had printed the coupon out from an e-circular I received earlier in the week. As I was leaving the fitting room, the clerk was handing them out like a proud papa hands out cigars. The juxtaposition of how eager they were to give the discount against how little it was actually advertised beyond their own website befuddled me.

  8. pecan 3.14159265 says:

    What if consumer buying was up really because of all the irresponsible people who were living beyond their means, getting giant mortgages, and spending money like it was sprouting from their sock drawers? And the responsible people who were paying their credit cards, managing their finances weren’t making much of a giant consumer dent because the irresponsible people (we know now) are a larger population than the ones who were doing just fine.

    So once those people dropped out of the picture because they could no longer spend, spend, spend, doesn’t the economy just reflect the fact that responsible people kept being responsible by either cutting back or not spending at all, and the bad eggs were just taken out of the equation?

    • B says:

      @IHaveAFreezeRay: I disagree with your assertion that the irresponsible people outnumber the responsible ones. Statistics show that most consumer debt is held by a small percentage of people.

      • oneandone says:

        @B: Despite the inaccuracy in ratio of ‘responsible’ vs. ‘irresponsible’, I think it’s a good point. If our economy was/is based on people (and companies?) spending beyond their means, is it right to perpetuate an inherently unsustainable and unstable system?

  9. tande04 says:

    @RockLobsterNet: That makes sense now.

    Thanks.

  10. proskills says:

    Deflation may be bad for the country/economy as a whole, but for anyone who has a job in a non-retail industry, it’s great! With falling oil prices, a strong dollar, and lower consumer goods, this sounds like good times for me!

    • ADismalScience says:

      @proskills:

      No. Whatever job you perform, service you provide, etc., overall purchasing power is decreasing at a substantial rate. There is simply a smaller market for whatever it is you do. That is not “good times.”

  11. Laffy Daffy says:

    Well it’s not happening with food prices. We were looking through the grocery ads this morning to plan our big family Thanksgiving feast and were a bit surprised. Other than the handful of loss leaders, the vast majority of advertised sales really are not the bargains we expected or have seen in past years.

    • Brazell says:

      @Party Boy: Agreed there. Milk prices have come down since the Spring and Summer, but many products are still high. I can understand it to a degree, as food distributors and producers are trying to comp some losses that they took with the hike in transport prices. But I’m hoping food prices go back down to pre-ethanol-subsidies level.

    • ElizabethD says:

      @Party Boy:
      I so agree. I used to do all my grocery shopping at the local supermarket (Stop & Shop, a biggie in our part of New England). Now, much of the pricing takes my breath away and I just keep walking. I’ve begun buying meats and fish at a local fish market with excellent sale prices; dry staples (cereal, spices, etc.) at the nearby “job lot” saver store; and then I comparison-shop the ads for the best deals on fresh produce and dairy. Everyone says “use coupons!” but most of the coupons in our weekly circulars are for highly processed and junky foods that we don’t eat. Where’s that coupon for half-off a carton of skim milk or a pound of ground turkey, huh? *sigh*

      • JulesNoctambule says:

        @ElizabethD:
        ‘Where’s that coupon for half-off a carton of skim milk or a pound of ground turkey, huh?’

        We shop at Kroger, and with their ‘rewards’ card we get coupons for exactly those kinds of items. A dollar off fresh vegetables, fifty cents off cheese, a dollar off fresh fruit and a coupon for a free bag of their store-brand organic frozen fruit were among the ones we had this month. We don’t spend ridiculous amounts of money on groceries, either, so I can only assume that these coupons are sent to everyone with their store card. I’m almost tempted to have my husband sign up for a separate card so we can get more coupons!

    • Outrun1986 says:

      @Party Boy: We are doing pretty good here due to 2 grocery stores having an all out price war even stronger than before even though these 2 stores have been in our area for some time now. They are really trying their hardest to get the customer’s business since the economy is tough! Turkey’s were advertised as .49 a pound but when we got into the store it was really .39, and no additional purchase required either. Needless to say we have the big freezer full of turkey now. The cost of Thanksgiving dinner for us is probably only up $1-2 from last year if that. We buy extra turkey’s and cook them throughout the year, they will last up to 2 years in storage when properly wrapped and frozen. You can’t beat a 10-12lb turkey for $5-6!

      Easter was worse since the cost of eggs was so high earlier this year, we were being charged 2$ for a dozen of large eggs and there were no sales like there had been in previous years (previously .89 or .99 a dozen). Eggs are back down to about 1.25 a dozen now.

  12. Brazell says:

    I feel bad gloating about this because it’s bad economically, and certainly my 403(b) is getting killed by it, but I got a major raise and coupled with dropping gas prices and consumer prices, my standard of living is significantly improved from pre-recession. I have a very secure job, but who knows, maybe that’ll change next year (it very well could), and even though this economic downturn is worrisome for us here, our numbers this year are stronger than ever. That could all change in March – May.

    But yeah, I feel for those who are getting screwed by it.

    • gibbersome says:

      @MichaelBrazell:

      Well I can now sit and laugh at all my fellow college graduates who went into finance, while I decided to take the slow and steady path through medical school.

      It’s about time we took money out of the hands of the paper pushers and gave it to the engineers, doctors, technicians and workers.

  13. jodark says:

    The only industry that prices aren’t dropping is Firearms and Ammunition. Prices are climbing almost everyday in that industry. Wholesalers are litterally selling out of all stock, leaving them with bare walls.

    Why? Obama. He wants to institute another AWB and raise ammo taxes 500%, so people are stocking up before hand. And before you say he supports the 2nd A, like he has said, read what he wants to do. He supports the 2nd if you gun isn’t black or scary looking with lights or scopes on it.

    Anyway, buying some Armalite, Bushmaster or Rock River stock might not be a bad idea if you are looking for short term investments.

  14. whydidnt says:

    This is funny, 3 months ago the sky was falling because energy prices were causing prices to rise too fast. Now it’s falling because energy prices have dropped and prices are dropping too fast. WTF??

    Seems to me both economists and the media like to scare everyone regardless of the situation.

    It will be interesting to see if all those “energy surcharges” and extra fees added during the oil crisis this year ever go away, or if they just become additional “other income” on companies bottom lines.

  15. narq says:

    You could almost say we’re on the brink of a depression, even a major depression. But they probably won’t say that until we’ve been in one for a year and a half and most of the country is in poverty.

    • ElizabethD says:

      @narq:
      I agree. I’ve been trying to remember my late parents’ stories about the 1930ish Depression and how their families got through it. Both of my parents ended up very cash-based penny-pinchers; we bought clothes at rummage sale (way before the advent of swanky consignment shops), and they paid cash for their last house. Neither ever owned a credit or debit card.

    • ADismalScience says:

      @narq:

      It won’t even officially be a recession until Q4 GDP is released, which is widely expected to be a decline in the 3-5% range. That would be two straight quarters of retraction, the traditional definition of a recession.

      A depression, or protracted recession, is a very unlikely event. Policymakers have taken a very active role in reducing our downside systemic risk. I am, however, concerned about a long-term period of little to no economic growth similar to Japan’s “lost decade.” I don’t think we’re there yet – this is more characteristic of the 72-75 recession so far.

  16. Daveinva says:

    A few notes.

    – In general, deflation is bad. More on that in a moment.

    – In this particular instance, deflation is probably a good, because so much of recent price increases were tied up in energy prices that were artificially inflated anyway (gee, I wonder where all the “peak oil” crowd is not that gas is dropping back to a $1.50 again?).

    – That said, again, systemic deflation is bad.

    Why? Simple– deflation changes the cost/benefit analysis of debt holding. Not just consumer debt, but *all* forms of investment.

    If your dollar is worth less today than it was yesterday, you’re going to have less ability to pay down debts you previously incurred.

    What’s worse, is you predict even more deflation down the road, you’re going to use your dollars today for their most cost-effective purpose: paying off old debt as quickly as possible. Leaving you with less money to invest.

    In a deflationary environment, the urge to acquire new debt evaporates as debt becomes an increasingly costly bargain. This isn’t such a bad thing for fixed income retirees with no credit cards to pay off, but for companies and small businesses, it’s murder.

    Of course, as deflation increases debt aversion, businesses start to go under, increasing unemployment.

    Deflation is like G-forces: the human body can withstand about 9 times Earth gravity for a brief time before one blacks out, but only about 3 times negative-Gs before red out.

    Deflation is much the same way– we can suffer a lot of inflation and not be in a bad place, but only a little deflation goes a long way to being bad for an economy.

  17. catnapped says:

    Prices are dropping? Really? I’m not seeing that much of it other than the gas station.

  18. Trencher93 says:

    This would ordinarily be good news, since you could buy more stuff with the same money, negating some of the inflation that will result from the bailout money that the Treasury has to print. But, since EVERYTHING is bad now, this is bad news, and it doesn’t really matter why. Inflation is bad, because it will trigger ARM mortgage defaults as interest rates rise. No way can rates go above 1% for the rest of my life, or the entire economy will collapse. But, if there’s deflation like this, it’s bad too because that means manufacturing will collapse and the economy will collapse along with it. Is this finally Mutually Assured Destruction in the economy with no way to stop it? I think we’ve finally crested an event horizon and are sucked into a black hole where there is no good news ever again.

  19. TechnoDestructo says:

    “This is true, but the problem is that if everyone can buy more stuff with less money – what motivation is there to manufacture more stuff? Ah-ha. Troubling, isn’t it?

    Not really. Most Americans don’t manufacture anything, and pretty soon, almost none of us will.

  20. twophrasebark says:

    It says right in the article: “But prices have yet to decline noticeably for most goods and services, with one conspicuous exception – houses.”

    Consumers are not really seeing the effects yet.

    But Christmas should be in-ter-esting, indeed.

  21. mrmcd says:

    [www.bls.gov]

    First of all, the data minus energy and food only decreased by 0.1 for this period, which is not nearly as terrifying as the top line number. The reason they compute the number minus those two factors is they tend to swing around a lot. In other words, the air went out of the oil bubble pretty damn fast once everyone got spooked and decided “oh hay maybe it’s not going to $3000/barrel by Feb after all!”

    Otherwise a drop in apparel prices (sucks if you’re high end) and the rest looks to be more or less flattening out. Looks to me more like an economic slowdown and a shitty season for retailers as people are much more cautious with their money.

    Also, footnotes! :
    ” The unadjusted data are of primary interest to consumers concerned about the prices they actually pay. “

    This is currently at 3.7 for the past year. Less inflation != endless death spiral or deflation. Deep breaths people.

    PS – I’m totally not an economist, however, so feel free to continue freaking the fuck out if you’d like.

  22. Fist-o™ says:

    Hey, Consumerist: I’m curious what you all think about Gerard Celente, CEO of the “Trends Research Institute”. This guy says that by 2012, we’re going to be in a full-on depression. I call BS, but I wonder what you all think.

    [www.trendsresearch.com]

  23. etherealclarity says:

    Can we get a little balance here please? Maybe a link to an article that explains why deflation can be a good thing, next to the ‘bleak’ one?