Irwin Kellner says that the weakening economy has brought with it falling prices, which may not necessarily be a bad thing.
The Economist magazine’s weekly all-items commodity index priced in dollars has fallen by about 30% since the beginning of 2011. Compared with this time last year, the magazine’s measure of all items prices is down by 13%, paced by a thumping 25% drop in industrials prices and a 29% plunge in non-food agriculturals.
When prices fall, it is usually considered bad news since it is associated with a lack of demand and excess supplies. It tends to beget a vicious cycle: During the Great Depression, for example, falling prices caused people to wait before buying, which hurt business profits causing layoffs and further reductions in spending.
Eventually, however, these falling prices help demand by boosting buying power. Business benefits as well, since more firms buy commodities than sell them.