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W2W: What to Watch – Deflation Dilemma

It’s a word that keeps Federal Reserve Board chairman Alan Greenspan on edge: deflation. In a talk with economists in Washington this month, Greenspan worried that deflation, a decline in prices, is the greatest danger the U.S. economy...

It’s a word that keeps Federal Reserve Board chairman Alan Greenspan on edge: deflation. In a talk with economists in Washington this month, Greenspan worried that deflation, a decline in prices, is the greatest danger the U.S. economy faces.

Some economists worry that the prolonged period of low interest rates the Fed has allowed in recent years has raised the risk of deflation. But Greenspan insisted that he’s confident the risk of the economy going into a deflationary cycle remains low.

That may be true for the U.S. as a whole, but deflation has been a reality in the apparel industry for several years.

The November Consumer Price Index showed retail apparel prices off 1.8 percent from their year-ago levels, in keeping with that index’s general downward trend of the past year.

A number of factors drive it: One is that technological advances during the past decades have given consumers lots of new options to spend their money. Where women promoted into the executive ranks in the Seventies might have opted to upgrade to Chanel suits to show their new status, today the latest cellular phone and the latest personal digital assistants are another visible badge of power and prestige.

Another contributing factor is retail competition. Industry observers regularly say the U.S. is “over-stored,” which essentially means there are too many retailers here trying to sell too much stuff to too few people. That leads to intense price competition at retail and wholesale, with merchants regularly telling suppliers that they want to pay less for the same items each year.

In part, this has lured production outside the U.S., along with free-trade policy and a shortage of trained workers. But with retailers also doing whatever they can to cut their operating costs some sources, particularly in the labor community, worry that the U.S. runs the risk of cutting the legs out from under the middle class that became the core of the economy in the 20th century.

That could make the risk of the contagion of deflation spreading from the soft goods sector to the rest of the economy a possibility.