Today, the Labor Department reported that the consumer price index fell 1.9 percent in November, the biggest drop since January 1932, the bottom of the Great Depression. If we drill down, the situation doesn’t look quite so bad. For instance, the CPI as seasonally adjusted declined only 1.7 percent. And if you exclude food and energy, prices were flat. Nonetheless, the price picture is a matter of concern.Why are lower prices bad? When consumers put off spending in anticipation of lower prices in the future, producers cut back in response to the slipping demand. Employers then lay off staff, and that further decreases the demand for goods and services. An economy entering a deflationary spiral takes a long time to recover. The Great Depression lasted years and was ended only by the entry of the United States into the Second World War.
We are perhaps months from entering a true deflationary spiral, but the trend of weakening consumer sentiment is clear. This, the Christmas shopping season, is the last time of year we should see prices soften. Presents should be flying off the shelves, but it seems, among the national retailers, only down-market Wal-Mart is prospering.
Frankly, I don’t blame American consumers. They can see that Washington is not up to the task of getting us through the global financial crisis. Most people here, exercising common sense, don’t support the auto bailout, as Jennifer Rubin points out today; President Bush’s 130 million stimulus checks earlier this year were both expensive and ineffective; and Henry Paulson has completely lost his way with the $700 billion bailout. Steve Forbes has called Paulson “the worst Treasury secretary we’ve had in modern times,” but he was charitable in adding the last three-word qualifier. Paulson has managed, through his botched handling of the Bear Stearns and Lehman Brothers rescues, to scare off foreign capital that might have made his rescues of AIG and Citigroup unnecessary – or at least less expensive. A list of his mistakes in the last six months would be book-length. The members of the Obama team can’t help but do better, but I am sure they will somehow manage to make things worse.
So until Washington can display some competency handling the economy, don’t expect consumers to express a vote of confidence by going into the shops. Look for a few more drops in the CPI soon – and perhaps deflation in America.