On my lunchbreaks, and during commercials for the few programs I watch with any regularity, I see glimpses of news programs, top stories, etc. A few months ago, economists were worried about rapid inflation. Fair enough; prices going up reduces buying power, which in turn slows the economy down.
Now, however, the concern is apparently about deflation; that is, prices “falling too far”. This confuses me, both in terms of the specific example (I believe it was gas prices), and in general.
Tackling the example first: It’s tempting to think of gas stations as the extension of “Big Oil”; keeping prices artificially high to squeeze out every cent of profit they can on the poor consumer–I’ve done this myself. But the truth is that, in today’s age of plastic, gas stations want lower prices as much as consumers do. The reason has to do with the fact that credit card companies take a certain percentage (Not a set amount) of every transaction. So in some utopia where gas costs the gas stations 90 cents a gallon, they’ll turn around and sell it for, say, a buck a gallon. On cash transactions, they make ten cents a gallon profit. On credit card transactions, if the credit card company is taking three percent of every transaction, that’s three cents a gallon, and the gas station makes seven cents a gallon in profit. Not bad.
Now as gas prices rise, the stations adjust their prices accordingly to keep that ten-cent profit margin. Eventually, this is a problem–imagine that gas now costs that same station $3.90 a gallon. They’re selling it for $4/gallon, so nothing really changes for cash transactions. They have a problem with credit card transactions, though. Three percent of 4 dollars is 12 cents a gallon the credit card companies are taking, so the station actually loses two cents a gallon on credit card transactions. This is, incidentally, why some stations offered discounts for paying in cash (Which is, incidentally, supposed to be illegal, but that’s neither here nor there; I’ll presume some exemption I wasn’t aware of was granted to the companies).
As for prices falling in general, I’m having a hard time seeing how that’s anything but a good thing. Lower prices means more buying power, which means more people buying more things (The American people as a whole showing a shocking lack of discipline with their money over the last several years), which stimulates the economy, does it not? Isn’t this what the Bush the Younger administration wanted with those stimulus checks a few months back (Incidentally, since I was on pretty solid financial ground, I’m pretty sure I’m the one person in the country who used the check as intended; hi Rock Band 2!)?
Economics confuses me. What I take away from all this is that prices doing anything at all other than staying right where they are is bad for the economy. Is this correct?