Deflation creates a dangerous spiral - Metro US

Deflation creates a dangerous spiral

If it isn’t one thing, it’s another. When economists aren’t fretting over a renewal of inflation, they’re fearful of deflation, a general fall in the level of prices for goods and services. Deflation is lately seen to have taken root in Japan. Consumer prices excluding food in that country dropped 2.4 per cent in August from the previous year, the biggest fall since the country started keeping records in 1971. It remains uncertain whether deflation will be exported to Canada like some economic H1N1, but this is not an infection we want. As tantalizing as it might be to think of our dollars having increased purchasing power, deflation would have mostly negative consequences. Falling prices can actually discourage purchasing, and in the longer term curtail output and investment, leading to lower overall demand. Eventually, you get a deflationary spiral that shrivels the economy.

For those who run businesses, deflation has scary implications. Take a grocery chain like Loblaws —deflation means product prices on the shelf decline, even while other operating costs such as wages, thanks to labour contracts, have built-in increases. Margins are then squeezed even tighter, bad news in a business that in recent years has been rapaciously competitive and, since last year, hobbled by recession.

Loblaws just introduced its new “Rounded Down” program of price reductions and its deputy chairman has recently said that food inflation is turning into food deflation. That will put grocery retailers under even more intense pressure to build sales revenues on the basis of volume rather than price. It means being locked into expansion plans to build the ever larger stores that can actually deliver volume and continuing with internal process improvements to make stock delivery and store operations more efficient.

For Loblaws, imminent deflation is just one more piece of distasteful news. The company has struggled successfully in recent years to rethink its product offering, fix a flawed supply chain, and fortify the bottom line, all with grocery predators like Wal-Mart encroaching on its territory. The payoff has been elusive. Loblaw Companies shares were worth more than $76 just four years ago. Today they’re just above $31. If deflation infects the checkout counter, the share price becomes just as vulnerable as the price of tomatoes.

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