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The Honolulu Advertiser

Posted on: Monday, November 12, 2001

Plummeting prices draw big attention

By George Hager
USA Today

Though the worsening economic slump has gotten the most attention, economists are pointing to another dramatic impact from the Sept. 11 terrorist attacks: Prices are plummeting, in some cases faster than they have in 50 years.

Energy prices have led the way, with oil dropping from its peak of $34 a barrel to below $20 early last week before rallying to $21.17 Thursday. Gasoline, which hit $2 a gallon in some areas, has fallen below $1 in some places.

The sharp falloff in prices in October — which offered the first full month of data after the attacks — was breathtaking:

• The U.S. import price index fell 2.4 percent in October, the government reported last Thursday, the largest decline since it began monthly publication in 1989.

• A gauge of prices paid for materials by the nation's factories fell to its lowest level since 1949, according to the National Association of Purchasing Management. The price of one commodity, sugar, increased, while 15 others dropped, including plastic, steel, aluminum and corrugated containers.

• The Agriculture Department's index of prices received by farmers recorded its biggest monthly drop in 26 years.

• Major commodity indexes recorded declines not seen since the 1950s and the 1960s, says Rick MacDonald, a senior economist with Standard & Poor's MMS.

After years of inflation worries, it's hard to imagine falling prices could be a problem. But when garden variety disinflation — a slowing in the rate at which prices rise — becomes deflation — where prices actually begin to fall — the effects can be ruinous. A key effect is slowed consumer spending.

"Why do I want to buy anything today if I think the price of this product is going to be lower three, six or 12 months into the future?" says Steven Wood, chief economist for FinancialOxygen. Spending slows, business profits fall, stock prices erode and companies increase layoffs, which further depresses spending, and so on.

"You can get yourself into a very vicious downward spiral," Wood says.

That's a big part of what has made the Japanese recession so intractable, and there's the possibility of it happening here. But Wood and others say it's unlikely.