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Colorado consumers’ thrift brings new worries

Aldo SvaldiThe Denver Post

With prices for clothes, cars, homes and other items falling, deflation worries have replaced the inflation fears of last summer.The U.S. Consumer Price Index rose 0.4 percent in January from December as fuel prices rebounded, but it fell from August to December, pushing overall consumer inflation down from a 5.6 percent annual rate in July to zero percent in January.The National Association of Realtors reports that existing-home prices are declining at a rate of 12.4 percent a year. And some employers are cutting wages.But economists are divided over whether falling prices (deflation) or rising prices (inflation) remain the bigger threat to the economy.”The next year or two could see more deflationary forces at work, with home and commercial real estate prices weak, low confidence, commodity prices declining, and a very weak U.S. and global economy,” predicts Jeff Thredgold, an economist with Vectra Bank Colorado.But longer-term, he and others view inflation as the bigger threat.”We would move from one crisis to the next. The economy will be under pressure two or three years out as we have to pay the piper with higher inflation,” said Michael Englund, chief economist with Action Economics in Boulder.The unprecedented amount of federal dollars being pumped into the economy, $787 billion in the stimulus package and $700 billion through the Troubled Asset Relief Program, will be difficult to absorb when the recovery begins, he cautions.Fed could tip recoveryIn the current crisis, the Fed has bought up a wide range of debt instruments backed by things like mortgages and student loans and credit cards that will be more difficult to unload when the recovery comes, Englund said.Selling could sharply drive up interest rates on key consumer loans, creating unprecedented political pressures. And if the Fed reacts too slowly, which it has a tendency to do, then inflation could get quickly out of hand, Englund predicts.”What the Fed is trying to do is inflate the economy,” said Wells Fargo & Co. senior economist Eugenio Aleman. “They are going to be successful at some point of time.”Should the current stimulus efforts fail to work, the U.S. government may resort to a desperation strategy: printing more money.That would devalue the U.S. dollar, unleashing inflation that could stay in the high single digits for some time, Aleman predicts.Those who expect deflation, however, downplay such scenarios.In 2008, commodity prices roared to record highs, global economic growth was still respectable and central banks were accommodating.If there was ever a recipe for inflation, that was it. And yet global inflation ran at only 4 percent, said Robert Bush, an analyst with Denver-based Eric Forecasting, which tracks fixed-income markets.”How can we have an inflationary problem moving forward? Demand is less, credit is less, everything is less,” Bush said.Faced with sharp declines in their net worth and declining incomes, U.S. consumers have curtailed their spending and started saving more.The U.S. personal savings rate, which hovered around zero in recent years, will increase 1 percent a year over the next 10 years, predicts economist A. Gary Shilling, a longtime forecaster of deflation.Price-hike resistanceProducers and service providers are under pressure to lower prices to win the more limited pool of dollars being spent. While some may go out of business, others will boost their productivity, easily matching increases in demand.Once deflationary expectations set in, they become self-fulfilling. Consumers, especially those who have lost their jobs or taken pay cuts, will resist price increases of any kind.Those who see long-term deflation coming argue government efforts to pump money into the economy pale compared with the losses in net worth suffered.Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com


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