Businessweek Archives

A Disinflation Honeymoon


Editorials

A DISINFLATION HONEYMOON

What is the amazing bull market telling us? Despite predictions of a much slower rise in equity prices for 1999, the Standard & Poor's 500 Index is up a hefty 10%, and the first quarter isn't even over. What ever happened to the Asia crisis? Where's the impact from weak earnings at some of the biggest high-tech companies? What's going on?

Disinflation. Thanks to falling prices, real personal income is taking a surprising turn--upward. Consumers find themselves with greater buying power and their spending is pumping up the economy. The consensus at the end of last year was that this would be a significantly weaker year for growth. Wrong, at least so far.

What's really surprising is how much falling prices are boosting the real purchasing power of consumers. Crude oil prices are down sharply, cutting the real cost of gasoline to historic lows. Taking inflation into account, gas is cheaper today than it was when cars had fins. It amounts to a whopping tax cut. Prices for computers are plunging as well (page 28). The sub-$1,000 personal computer is the fastest growing sector of the market, bringing the digital frontier to a bigger portion of the American population. And, thanks to globalization, prices for imported goods from Asia are sharply lower. Depreciating currencies against the dollar also are boosting the purchasing power of U.S. consumers.

The risk is that price declines get out of hand, and deflation takes hold. A deflationary spiral is crippling Japan, where falling prices are cutting corporate revenues, causing layoffs and drops in income and consumption. But that is just a cloud on the horizon of the strong U.S. economy. For the moment, the stock market is telling people to invest and enjoy.


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus