Is bargain aisle also deflation alley?

Low and falling prices are becoming ingrained in the consumer psyche - for better or worse.

Retiree Herb Tamres considers himself a "careful" shopper. He waits for sales. He remembers what he's paid for his groceries in prior weeks. So, as he walks out of a Stop & Shop in Oyster Bay, N.Y., he's pleased that he's got a pound of ham and cheese that were on sale.

"When I shop, I want to know what are the specials," says the Mill Neck resident.

He's not alone. Cost-conscious shoppers have been seeing prices plunge on goods such as computers, blue jeans, sandals, and even Harry Potter card games. Bargains are evident from Circuit City to the local auto mile. And while food prices haven't fallen overall, alert buyers at this Stop & Shop can find hot deals from Aisle 1 to Aisle 10: half-price bottled water, discounted razors, and more.

Welcome to "I can get it for you cheaper" America. It's a phenomenon that has Alan Greenspan watching prices as closely as Mr. Tamres. The Federal Reserve chairman worries that tumbling prices on many goods - while they make shoppers happy - could lead to broader deflation that harms the economy.

Tuesday, there was more evidence of this bargain hunter's paradise. The consumer price index for May, after falling in April, showed no increase. Last week, the producer price index, a measure of wholesale prices, dropped for the second consecutive month. The prices of goods other than food and energy - known as the core inflation rate - were up slightly. The White House Tuesday tried to cast a favorable light on the report.

Spokesman Ari Fleischer said the CPI report suggests deflation "is not a serious worry."

The concern among economists is that if consumers don't buy - as they wait for prices to fall still further - the economy shrinks and jobs can disappear.

Wall Street showed a bit more concern than the White House, as stock prices fell in the morning after a sharp rise on Monday.

"Almost all goods are falling in prices," says Mark Zandi of The Economy.com, an economic website and consulting service. "I can't think of anything other than college tuition and private-school tuition that had a significant acceleration of inflation."

The low prices are having an affect on the way consumer expectations. The University of Michigan Surveys of Consumers has found that consumers expect the inflation rate to average 2.6 percent annually for the next 10 years. "It's lowest since we started asking in the mid-1970s," says survey director Richard Curtin.

THE Michigan surveys show that consumers expect "stable" prices. Only 5 percent expect declining prices. This is significant, says Mr. Curtin, because when consumers begin to expect prices to be lower in the future, they hold-off buying. "This encourages business firms, as their sales decrease, to offer larger discounts."

An example of this is the auto industry. The May CPI report showed auto prices dropping by 0.1 percent. In order to stimulate sales, auto companies continue to offer incentives to entice buyers to the showroom. For example, Kia, the Korean manufacturer, is offering zero-percent financing and $2,000 rebates on some models. If the buyer is a past customer, they will add another $1,000. General Motors' Saturn division is giving college grads $750.

Businesses are warily watching this trend. For example, Dave Sneddon runs three New York area specialty/produce markets called Fairway. He would prefer to see prices creeping up instead of remaining flat or going down.

Most of his employees are unionized, so they receive wage hikes that are built into their contract. But he can't think of anything other than imports that have gone up in price. If "your expenses rise and prices are falling, ... this is not good," he says.

Even when prices are rising, many retailers are absorbing the price increases in order to keep their customers happy. That's the case for Berk's Shoes in Cambridge, Mass., a trendy Harvard Square store. Kenneth Berk, the owner, says he is seeing on average a 3- to 5-percent increase in his costs. "My customers are price-sensitive, so when something goes up in price, we absorb the increase and don't pass it on."

Out at Oyster Bay, consumers are happy with the price trends. As he leaves the store, Chuck Bartlett says he is especially glad to see the price of gasoline dropping. He drives a Land Rover that gets about 12 miles to the gallon. "I am definitely aware of the fact gasoline is down about 10 to 15 cents a gallon," he says.

Another customer, Michael Buzzeo, remembers the 1970s, "the Carter days when prices felt like they were rising at 10 percent per week." As he walks out with some half-price Poland Spring water, he says, "I have very low expectations for inflation."

Some of those price reductions at the store are aimed at generating traffic, says the manager. And it seems to be working.

After Mr. Tamres paid for his ham and cheese, he finds out razor blades have four dollars off the price. He ducks back in and buys some. "It's worth it to wait for a sale," he says.

Elizabeth Nesoff contributed.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK