The D Word

D-D-D-Deflation is finally being uttered openly by the financial press, and with good reason.

While pockets of inflation may be cropping up in food and low-priced items, deflation could be just as much of a concern for sellers of appliances and vehicles, which are often the first items to be struck off shopping lists in a difficult economy.

Grim data on economic growth, consumer spending and housing, along with stubbornly high unemployment, have fanned fears of a deflationary environment where weak consumer demand forces a steady fall in prices of goods.
Moody's Analytics chief economist Mark Zandi sees a one in six chance of outright deflation in the U.S. economy, while some others said the odds could be as high as 50 percent.

"No industry suffers more from deflation than retailers," Zandi said, since they already operate on thin margins.
The timing of a bout of deflation could not be worse.

After offering mega-discounts to boost spending in the trough of the recession, retailers are struggling to retrain Americans to buy goods at full price.

If consumers postpone purchases, inventory builds up, forcing retailers to drop prices, said Kronos Chief Economist Robert Yerex.

That's why the durable goods numbers are so important.  Right now they're starting to indicate that dishwashers, refrigerators, flat-screen TVs and washers and dryers are staying on store shelves.  This holiday shopping season people are going to be expecting big, big discounts.  Fewer and fewer retailers are going to be able to give them.  That's bad all the way around for the economy.

We're getting to the point where something's going to have to give and when it goes, it's going to leave a crater.  And that brings us to the other D word:  depression.