Low prices seem like a good thing, but they can be dangerous. this is the reason

(CNN) — After more than two years of rapid price increases, discounts in some stores feel like a much-needed respite.

But business leaders, economists and investment magnates are not optimistic about this.

Technology investor Cathie Wood, founder of ARK Investment Management, Advertise for the Wall Street Journal In an article published on Wednesday, she said she was more concerned about deflation, when prices fall, than inflation. “We are seeing more and more signs” of contraction, he said.

The decline in prices of raw materials such as copper and wood has “adversely affected” the company’s profits Home Depot In the third quarter, CEO Ted Decker told investors on the company’s earnings call earlier this week.

“For example, the lumber price averaged about $420 per 1,000 board feet, compared to $545 in the third quarter of 2022, which represents a decline of more than 20 percent,” added Billy Pastek, executive vice president of merchandising at Home. %”. storehouse.

Why wouldn’t people buy more if prices were lower?

One of the first lessons learned in Economics 101 is that when the price of a good is higher, people demand less of it. When the price of a good is lower, people demand more.

But the problem with deflation is that when people begin to expect prices to fall in the future, there is little incentive for them to buy now. For example, unless absolutely necessary, why would we buy a new oven today if we think the price will drop significantly in a month?

When enough people think this way, there is a massive reduction in spending. This can cause recession if it means that companies cannot hire as many workers as they could.

Deflation is not widespread in the United States.

Deflation is not a widespread problem in the United States, which, like many other countries, suffers from inflation.

But in China, prices of all goods and services fell by 0.2% in October compared to the same month of the previous year.

Consumer prices in the United States rose 3.2% over the past year, according to the latest Consumer Price Index. But while Americans continue to pay more for goods and services than a year ago, the pace of increases has slowed considerably.

However, many goods in the United States are much cheaper than they were a year ago.

For example, egg prices fell 22%, the second largest year-over-year price decline after health insurance, according to October CPI data.

Consumers may soon experience more consistent price reductions at grocery stores, Walmart CEO Doug McMillon said Thursday. He also warned that US-based Walmart could enter a “deflationary environment.”

In addition to eggs, other cheap goods include plane tickets, gasoline, home appliances and smartphones.

Preston Caldwell, chief US economist at Morningstar, referred to this as “selective deflation.” For now, he said, “it helps push headline inflation to the Fed’s 2% target with minimal pain in terms of unemployment and loss of output.”

“In other words, this makes a soft landing possible,” he told CNN.