- The Washington Times - Thursday, May 14, 2009

Declining retail sales and increases in import prices have economists debating whether the combined effect will reduce the chances of deflation - a sustained drop in prices that can start a vicious cycle of falling consumption, rising interest rates, declining investment and increasing debt.

Retail sales fell in April for the second month in a row as households, concerned about the soaring unemployment rate, kept a tight rein on their wallets and pocketbooks after massive declines in wealth.

The 0.4 percent drop in retail sales in April followed a 1.3 percent decline in March, the Commerce Department reported Wednesday. Compared with a year ago, sales were down 10.1 percent, the second-steepest 12-month plunge since records began in 1992.

Weak retail demand continues to put downward pressure on consumer prices, which have declined 0.4 percent during the latest 12 months. But rapidly rising oil prices lifted overall import prices, which increased for the second month in a row in April, Commerce also reported.

With the consumer price index falling and the economy suffering its most serious recession since the Great Depression, the Federal Reserve has been concerned about deflation. After Japan’s housing and stock market bubbles burst during the early 1990s, economists have argued that Japan’s failure to address deflation resulted in its economy suffering through a “lost decade” of multiple recessions.

With prices falling, consumers have incentives to delay purchasing goods. As demand declines, output and investment fall, creating what economists call a deflationary spiral.

Last week, Fed Chairman Ben S. Bernanke said the danger of deflation was “receding.”

“The risk of deflation is slowly receding as inflation expectations firm and import prices rise,” agreed Ryan Sweet, an economist at Moody’s Economy.com. “Higher oil prices over the next several quarters will put a floor under import prices,” said Mr. Sweet, who expects the price of oil will average above $50 per barrel this year and $74 in 2010. Oil prices, which reached a five-year low of $32 a barrel in February, surged above $60 this week for the first time in six months.

April’s overall import-price increase of 1.6 percent is “hardly” a sign of building inflationary pressures in the economy, said Jay H. Bryson, global economist for Wachovia Economics Group. “Excluding petroleum, import prices were down 0.4 percent in April, the ninth consecutive monthly decline.” Mr. Bryson expects economic weakness in foreign economies “will exert downward pressure on U.S. inflation indicators in the months ahead.”

The latest retail sales report revealed continuing weakness in the U.S. economy as well.

“This is not a pretty report, no matter how you look at it,” said Brian Bethune, chief U.S. financial economist for IHS Global Insight. “Spending weakness was fairly broad based.”

The biggest declines occurred at gasoline stations and electronics, furniture, clothing and grocery stores.

“There is little upward trend to spending now,” said Scott Hoyt of Moody’s Economy.com. “In the face of a still very difficult job market, huge losses in wealth and dramatically reduced access to credit, spending is not rising to any significant degree.”

The private sector has jettisoned 6 million jobs since the recession began in December 2007. National home prices have plunged 27 percent since they peaked in mid-2006, according to the S&P;/Case-Shiller national home price index. Rising unemployment, plummeting home values and falling stock prices throughout 2008 reduced household net worth by a staggering $11.2 trillion last year, according to Fed data.

“Consumers will remain conservative in their spending,” Mr. Hoyt said. “The 4 percent saving rate, well above its sub-1 percent level from 2005 into early 2008, is testimony to this behavior.”

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