Are falling prices really good?

As COVID19 continues to wreak havoc globally and forced citizens to stay home, prices of consumer items have either reacted waywardly or obediently. For one, some food and health care related items shoot up immeasurably. The non-essential items and a few primarily used commodities such as oil, on the other hand, dropped enormously. 

Amid the COVID19 threat, just for the drop in oil prices alone, a lot have rejoiced. However, are falling prices really good? It can be recalled that in 2008, the beginning of the global recession in 2009, we saw the rise of oil prices to almost US$150.00 per barrel in July and witnessed its plummeting to US$37.00 per barrel towards the end of the year. Its price decline was never difficult to comprehend. It was primarily due to a sizeable drop in the demand for oil globally, especially, the USA.

Precariously, the USA was in dire economic crunch since the middle of 2008 until the end of 2009. In fact, then, all indicators point not just on recession but deflation as well. With its sheer size, its economic turmoil traversed all over the globe. Manufacturing and financial companies were closing down. Foreclosures of mortgages were worse. Consequently, economic activities like manufacturing had largely slowed down. As these manufacturing outfits used to consume sizable quantities of oil, its demand therefore had substantially dropped. 

Generally, falling consumer prices could usher in bad times especially for stagnant economies because people speculate and will normally wait till prices will move further down for better deals, thus, resulting to weaker economic activity. Obviously, the absence of demand could spell trouble.

So that, having cheaper oil is not worth rejoicing at all. On the contrary, this is a very precarious economic condition. The cheaper price, especially if brought about by the absence of demand, makes deflation not just possible but inevitable. An economic condition that obtained during the 1930s. Universally referred to as the Great Depression, this is the same situation that prevailed in Japan since 1990 until the middle of the last decade. 

Though this oil price drop is unique as COVID19 influences it, there is still a need to know the possible consequences from it, like recession (when GDP drops in two successive quarters) and deflation. Something new to this generation, dictionaries in economics define deflation as a “situation where there is a general decline in prices, often caused by a reduction in the supply of money or credit.” Deflation can be caused also by a “decrease in government, personal or investment spending.” The opposite of inflation, “deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.”  

While cheaper prices could be a happy development, its darker side is more catastrophic.  If these will persist, the decline in prices will generally create a vicious spiral of negatives such as falling in profits for businesses, to closing of more factories which will surely lead to unemployment, diminishing of incomes, and increasing defaults on loans by companies and individuals. 

To most of us, struggling Filipinos, who have been so bitter about high cost of oil and food might even think that the idea about deflation is so attractive. However, economists generally agree that this is entirely not just bad news but could be worse to some extent. 

Why? When deflation pervades in the USA or in countries where we export our products, our economy will certainly suffer. When prices start to fall because of lack of demand, prices will likewise drop. It shall drop to a point where manufacturing companies might find their production costs higher than the selling prices. Therefore, companies will have no other alternative but to cut back on production. Once production targets are cut, some factories may have to close. Consequently, these countries’ unemployment rate rises. As the list of unemployed individuals rise, even the demand for consumer products will certainly decline.

Consequently, we shall find no market at all for our products. If there is, prices will be unprofitably low. As the USA buys all over the globe, therefore the global economy suffers as well. Obviously, therefore, we can’t count on countries in Europe, like Germany, Great Britain, France and Russia. Neither can we count on Australia and other affluent countries in Asia as potential customers. Remember, the Middle East, a supposedly potential buying region, will also be severely affected by the drastic oil price drop. 

Finding no market for our exportable products, our manufacturers shall consequently cut production targets. In doing so, they shall close factories for a longer period (even after COVID19 is gone) and worse, fire employees. With a growing list of unemployed and, therefore, penniless Filipinos, demand for local products will surely decline. Thus, even companies that are just supplying the local market shall suffer as well.