Deflation steps in as economic factor

Consumer prices have fallen 3 percent in the past three months and may drop another 1 percent in 2009, economic forecasters at HIS Global Insight said.

The price decline is the sharpest three-month drop in prices since 1933, The New York Times reported Wednesday.

Deflation alarms economists, but has a silver lining for some families, the Times said.

Economists fear that falling prices cause shoppers to hesitate. With prices likely to be lower next month, why buy a car, a refrigerator or a DVD player today?

That kind of hesitancy causes industrial production to stall, contributing to declines in profits and further layoffs.

But some families can find their standard-of-living increase because of a phenomenon known as the sticky wage issue.

In other words, wages in a recession rarely drop.

Employers almost always choose layoffs instead of making pay cuts, explained Yale economist Truman Bewley.

Reducing the pay of existing employees was nearly unthinkable because of the impact of worker attitudes, Bewley wrote in his book Why Wages Don’t Fall During a Recession, the Times reported.

The advantage of layoffs over pay-reduction was that they ‘get the misery out the door.’ Bewley wrote.