A rapid drop in inflation may help shoppers’ dollars go further, on the contrary it’sitting a disturbing trending for investors

By Ben Steverman

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Forget inflation for now. Prices are falling on almost everything, including stocks.

Investors emergency to put to a new reality: A few months ago, inflation was a top worry, especially the impact of sky-high fuel prices. Now, although consumers can celebrate falling prices at the gas pump, investors’ worry is exactly the opposite.

Instead of inflation, the problem is deflation, a downward drift in prices that could squeeze incorporated profits and investor returns to uncomfortable levels.

PPI Posts Record Decline

On Nov. 18, a government report showed an unexpectedly large 1% drop in the October consumer price index, including an 8.6% plunge in energy prices last month. Excluding energy and food, the CPI fell 0.1%, the earliest drop in the so-called "core" index considering 1982.

On Nov. 17, the producer estimation index, a measure of wholesale prices, lay prostrate 2.8% in October, including a 12.8% descend in animation prices. That was the largest decline in the PPI in the report’s 61-year history.

After a rope rise in prices in early 2008, consumer prices are still up 3.7% in the past year, notwithstanding that that’s down from a 4.9% annual increase in September.

Economy Facing "Extreme Stress"

Economists say the newly come price declines do help consumers (BusinessWeek.com, 11/19/08).

However, predominant deflation is also a sign of the extreme stress the economy is under right now. "Clearly, demand is down worldwide," says Brian Levitt, economist at OppenheimerFunds (OPY).

Falling prices—for everything from merchandise to airline tickets to habiliments—are a sign of in what condition much economic activity has slowed. For example, consumer animation prices are right side 43.1% in the past three months. In October lonely, airfares dropped 4.8%, and apparel prices dropped 1%.

Deflation Can Be Destructive

In a sign of manufacturing’s weakness, John Ryding of RDQ Economics points finished that scrap steel prices have fallen from a high of $523 per twenty hundred gross in August to $144 per 2 last week.

Falling prices aren’t just a symptom of economic weakness, they’re also destructive in and of themselves. "A deflation helix is in all probability the biggest risk to the good husbandry," Levitt says.

As demand declines and prices fall, companies cut trade and investment, slowing economic growth even further.

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