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Falling Prices Now a Worry
It sounds surprising, given all the concern over high prices at auction, but a bigger concern for many economists is prices falling.
Deflation is general decline of prices caused by a lack of spending. It has caused several of the biggest economic crises in history.
This becomes a vicious circle as consumers put off purchases until prices drop, causing prices to drop even more.
“It’s a demand strike,” said Jeremy Anwyl, CEO of Edmunds.com.
The electronics industry has dealt with this issue for a long time. Items such as cell phones and entertainment systems quickly move from luxury items to inexpensive goods.
Constant content upgrades allow that industry to work around the deflation problem. That’s more of a challenge for the auto industry.
Anwyl points out that new cars should actually be even more expensive than they are today when prices are adjusted for inflation and increased content.
Fears of deflation are somewhat inflated, however, according to Paul Taylor, chief economist for the National Automobile Dealers Association.
A major cause of deflation is a decrease in the price of assets. That’s isn’t happening today due to the strong economies in the emerging world which both consume and provide most key resources.
“The prices of things that go into vehicles aren’t falling,” Taylor said.
There is some disinflation occurring. That means a slowing of the rate of inflation.
Used-car prices, as measured by the Bureau of Labor Statistics, show that happening. Prices rose by 0.8 in July, down from 0.9 in June.
Manheim chief economist Tom Webb said he expects retail prices to decline.
The churn rate of vehicles is definitely lower as consumers lack the confidence to make a major purchase, Webb said.
“It’s convenient to say (used-car buyers) buy vehicles out of necessity, but the fact is they buy to move up,” he said.
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