Falling prices not necessarily good news

TYLER, TX (KLTV) - By Sara Story - bio | email
Posted by Ellen Krafve - bio | email | Twitter

TYLER, TX (KLTV) - American shoppers are experiencing some low prices, especially at the gas pump. While this may be good news for your personal finances, economists warn the trend could be dangerous in the long run. The consumer price index, which monitors inflation, dropped for the third straight month. Low prices has stirred up talk of deflation.

Drivers are fueling up for less. Two years ago in July, the average price of gas was $4.11 a gallon. Today, the average price has dropped to $2.65 a gallon.

The Labor Department reported the low energy prices account for the consumer price index dip of .1% in June.

"What's happened is the consumer price index which is a composite measure has gone down a little bit for three months in a row," said Dr. Harold Doty, the UT Tyler Dean of Business and Technology. "Most of that is driven by gas prices."

Doty says falling prices are not good news for a recovering economy like ours.

"When prices go down, people want to hold off their purchases because it is just going to get cheaper later," said Doty. "So that slows our economy down when people restrain spending."

"Just because we really don't know what is going to happen tomorrow so you really need to conserve what you have today," said Linda McGreggor.

A survey by the University of Michigan and Reuters mirrored the mood. An index of consumer sentiment fell from 76 in June to 66.5 in July.

"Falling prices are not good," said Doty. "If real prices start to fall for very long it means we slip into a deflationary period."

This means if consumer prices, other than energy, start to fall, our economy could be in trouble. The last time the U.S. experienced serious deflation was the great depression 80 years ago. But, Doty says don't panic yet.

"I don't think that we need to be concerned that we are going to have a catastrophic deflationary event," said Doty. "I think what we are looking at is a very slow and gradual recovery. Not a spike upward."

It is a recovery that will take five to six years before bouncing back from the recession.

The Labor Department reported that the "core" consumer price index, which takes away energy and food, actually rose .2% in June. This is still below the government's inflation target.

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