NCPA - National Center for Policy Analysis

Some Prices Are Falling

January 19, 1998

Core inflation ran at only a 1.8 percent annual rate during the past six months and many economists think the official Consumer Price Index overstates inflation by at least one percentage point. So what sectors of the economy are feeling the effects of near zero inflation? And how are consumers benefiting?

  • In a low-inflation environment, corporations are better able to plan and make decisions, long-term interest rates fall, the Federal Reserve can allow expansions to run longer -- all of which result in higher levels of growth, more capital investment and increasing productivity.
  • For consumers, the price of building new homes has been restrained, as have been college costs; and prices on everything from autos to home computers to sporting goods and soft drinks are dropping.
  • The price of housing has risen at only a 3 percent rate over the past six months, compared to a 3.2 percent rate for the previous six months.
  • After chalking up annual increases of 12 percent during the late 1980s and early 1990s, the total cost of attending public universities rose less than 3 percent a year from 1993 to 1996, according to the National Commission on the Cost of Higher Education.

But economists warn that if price stability gives way to true deflation, things could become ugly. Assets such as stocks and real estate could be hit by runaway deflation. Commodities businesses -- particularly oil, steel and copper producers -- are already being affected by falling prices for their products.

Source: Michael J. Mandel, "The Zero Inflation Economy," Business Week, January 19, 1998.


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