Dropping prices bringing fears of deflation

Deflation could be more bad news for the economy. If prices keep falling, companies won't be making enough profit to pay their employees.

Posted: May 12, 2020 9:35 PM
Updated: May 13, 2020 6:53 AM

MASON CITY, Iowa - It might sound like a good thing.  The prices on some of the items you buy are going down.  Some economists warn falling prices are just another symptom of an economy struggling to stay afloat.

The Consumer Price Index dropped almost a full percentage point in the month of April, by 0.8%.  

"We know that when there's a decline in demand like we've had across the country, well across the globe, that's downward pressure on prices," said Rayce Hardy, an economics instructor at Riverland Community College.

He says people who are out of work aren't shopping, especially when most stores are still closed.  It's an alarming combination Hardy says could lead to deflation, something we haven't seen for decades.

"We call it the Great Depression and the Great Recession because you haven't heard of them too often. They aren't around very often and we haven't had any deflation since then," said Hardy.

Hardy describes a spiraling effect when it comes to low prices.  You might decide to hold off on making a purchase because prices could dip.  Inventory sits on shelves causing oversupply, which only causes prices to continue to plummet.  Then it starts to impact the workers.

"If I'm the employer and I can't lower the wages of my worker instantaneously like I can the price of my bananas, I might have the worker come in only 30 hours this week or I might send him home for a week," he said.

It's this economic downturn that worries people like cardiologist Avaneesh Jakkoju, who fears the economy won't rebound quickly.

"The fact that many people are not working right now they might not be spending as much as they might have. That all kind of makes matters worse," said Jakkoju.

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