Transcripts

Prices Are Falling & So Is Consumer Confidence

SUSIE GHARIB: The weak economy is already impacting consumer prices. The government said today that its consumer price index plunged 1 percent last month, the most on record. The so-called core rate, which excludes food and energy prices, also fell unexpectedly for the first time in 26 years. As Erika Miller explains, while lower prices are welcome news for consumers, they could spell trouble for the economy.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: For holiday shoppers, it's hard to see any downside to deep discounts. After all, it means great deals on clothing, toys, even groceries. Prices have also been dropping on airfares, automobiles and hotel rates, a boon for anyone thinking about traveling. And filling up your gas tank is also a lot less costly, leaving more money for other things. According to AAA, regular unleaded is now approaching $2 a gallon nationwide, down from nearly $3 a month ago. You might think all these falling prices would be great for the economy, enticing consumers and businesses to go out and spend. But economist Anna Piretti, does not think that will happen.

ANNA PIRETTI, SR. ECONOMIST, BNP PARIBAS: Because the unemployment rate is rising, we do not think that consumers are going to allocate the extra money they have from lower gasoline prices to actual expenditures. Consumers are likely going to allocate that to savings or to paying down their debt.

MILLER: Even worse, economists say it's no longer out of the question that there could be deflation down the road. That's a prolonged slide in prices, which has dire economic consequences.

PIRETTI: If consumers are expecting prices to be lower tomorrow than they are today, they are likely going to postpone any consumption. So, instead of purchasing a car today, they're going to wait for next month, because prices are going to be lower.

MILLER: Deflation conjures up images of the soup lines of the great depression and the so-called lost decade of Japan between 1995 and 2005. Although most economists do see a fairly painful recession ahead, Anthony Chan and others do not see anything close to those historic calamities.

ANTHONY CHAN, CHIEF ECONOMIST, JPMORGAN PRIVATE WEALTH MANAGEMENT: The level of stimulus today is quite impressive, whether it's from the monetary side or whether it's from the fiscal side. And when you put those amounts of stimulus together, I think it really does reduce the probability quite significantly that we're not going to approach those dire straits anytime soon.

MILLER: The danger of deflation is also the difficulty of a cure. Today, the Federal Reserve hinted it may lower short-term interest rates again in an effort to stimulate spending. But, many worry that won't help much, given the cautious mindset of consumers. Erika Miller, NIGHTLY BUSINESS REPORT, New York