ARCHIVE :: JANUARY 2003 :: ECONOMICS

Ups and Downs

Why Prices Are Falling
For Some Products,
And Rising for Others

By JON E. hilsenrath
STAFF REPORTER OF The Wall Street Journal

Take a trip to the mall these days, and you might not believe your eyes. Prices are heading south for items from bedroom furniture to sports equipment to watches. But take a look at a college admissions booklet, and you might want to cover your eyes. Tuition prices are going through the roof. A year at Harvard University, for example, costs more than $35,000 this academic year.

Welcome to the American economy’s twilight zone, where prices don’t just rise or fall. They do both.

For the past quarter century, Washington’s economic policy makers have been fighting an economic dragon called inflation. At its worst in the 1970s, inflation meant that prices across the whole economy were rising at more than 10% a year, eating away at the purchasing power of a dollar. Today, most economists agree, the inflation dragon is taking its last puffs of breath. Overall consumer prices are growing at the lowest rates since the early 1960s.

But what’s taking inflation’s place is a strange mix of both rising and falling prices that is having a big impact on the economy, and how your family’s money gets spent.

Global Economy

 Just consider, prices for television sets are down 11% from a year ago, but cable-TV service costs 6% more. Ford, General Motors and DaimlerChrysler are dangling cheap 0% finance deals on new cars, but the cost of insuring those cars is up 9.5% from a year earlier. Season-ticket prices for San Francisco Giants baseball games were up 8% from the previous year. But walk into a Sports Authority store, and you can walk out with 15 Top Flight XL 2000 golf balls for $13.99, $6 less than a year earlier.

What’s behind this strange mix of rising and falling prices? A lot can be explained by the global economy.

Prices tend to be falling in industries that face brutal global competition, such as cars or computers or clothing. Some manufacturers are finding that they can produce goods in places such as China or Mexico where labor costs are very low, pushing prices down.

“Those industries and businesses that are competing on a global market have no pricing power,” says economist Mark Zandi. “They have to cut prices to remain competitive.”

Prices are still rising, on the other hand, in industries where offshore production isn’t such a big factor. These tend to be industries providing local services, like education, medical care, legal services or even haircuts. These industries usually are more insulated from global competition. “We really don’t care how many barbers there are in Mexico,” says economist William Dunkelberg.

Mixed Messages

 Not surprisingly, this mix of inflation and deflation carries a mixed message for consumers. In the economic slowdown, wage gains have slowed, too. That makes it harder to keep up with price increases in education and health care, which especially hurt families with children in college and the elderly. But the outright declines in prices for globally produced commodities such as computers or televisions mean there are deals galore for people with money to spend.

There also is a mixed message for workers. Many people working in industries where prices are falling are finding that their jobs are at risk. When prices fall, that squeezes corporate profit margins. To make ends meet, companies have to cut costs to become more productive. For example, telecommunications prices have been collapsing. Lucent Technologies, which makes telecom equipment, recently announced it will lay off 10,000 more workers to try to repair its profit margins. Overall in the past 12 months, employment in the telecommunications sector has fallen by more than 100,000 jobs. The good news is that jobs are available in industries where prices are rising. Employment at hospitals, for instance, is up by 117,000 jobs in the past year.

The big worry among economists is that falling prices could become more entrenched throughout the economy, in both goods and service sectors.

This could lead to a widespread decline in wages as companies cut costs. The term for such widespread declines in wages and prices is deflation, and economists warn that if it sinks in, it won’t be pretty. Japan has endured deflation for several years, and its unemployment rate has soared in the process.

Right now, most economists agree that the economy is slowly reviving, and that it will escape deflation’s clutches. If it doesn’t, policy makers in Washington will have a new dragon to fight.