You may love a good deal. But that doesn't mean you should always be happy about lower prices.
Economists, including those that oversee the Federal Reserve, fear that the U.S. could enter a much-dreaded deflationary spiral. That's when companies are forced to lower prices in order to stimulate demand. Then, faced with lower revenues, they lay off workers. That, in turn, leads to lower consumer spending and reduced demand for goods.
September's consumer price index notched on a scant 0.1% increase, mainly because of gains in food and energy prices. The prices of a number of things in America have dropped sharply since the beginning of the recession. Housing is an obvious example, but fierce competition combined with a fall-off in the price of components has driven down the prices of many kinds of consumer electronics. Clothing, used cars and recreation costs have all declined recently.
To show the breadth of price declines across the U.S. economy, we've consulted industry research firms, such as iSuppli and Zillow to compile a list of nine well-known and widely owned products that have dropped in price over the last year:
Last year: $299 (price of a Kindle 2 in September, 2009)
This year: $139 (price of a third-generation Kindle with Wi-Fi. It's $189 for third-generation Kindle with Wi-Fi and 3G in September, 2010)
In response to the growing popularity of e-reading devices, Amazon has once again lowered the price of its Kindle. Competition has grown fierce, not only with the Barnes & Noble Nook, which recently underwent a price reduction from $259 to $199, but with other devices featuring electronic reading capabilities, such as the Apple iPad. The move reflects that, even as a leader in the market, Amazon (AMZN) must fight to maintain its position.
Last year: $16,765 (price of 2010 Jetta)
This year: $15,175 (price of redesigned 2011 Jetta upon release in June)
Volkswagen has a significant stake in nearly every market in the world, with one exception: the U.S. The German automaker hopes to get a much bigger foot in the door by releasing many of its new models for several thousand dollars less than the same model in the previous year.
Microsoft's Xbox 360
Last year: $400 (the market price of an Xbox 360 Elite in August, 2009)
This year: $300 (the market price of an Xbox 360 S, the upgraded version of the Elite)
Since the Xbox 360, Sony's Playstation 3, and Nintendo's Wii platform all entered the gaming console market, a price war has ensued. It has prompted each of the three brands to repeatedly cut prices. Today the most up-to-date version of Microsoft's (MSFT) console, the "360 S" is being sold for $300. That is $100 less than what the "360 elite," its comparable predecessor, sold for last year.
Last year: $1,479 (the average price of a flat screen, LCD TV sold in the third quarter of 2009 in the U.S., according to iSuppli)
This year: $1,177 (the projected average price of a flat screen TV sold in the third quarter of 2010 in the U.S.)
As the costs for component sand manufacturing fall through the floor, flat-screen TVs are rapidly making the transition from luxury item to household staple. The market has become flooded with brands. In order to stay competitive, companies are cutting prices. This past year has seen major price reductions from LCD manufacturers like Samsung, LG Electronics, and Panasonic.
Downy Fabric Softener
Last year: $3.49 (the price of a 64-ounce bottle of Downy fabric softener on sale during summer of 2009)
This year: $2.99 (the price of a 64-ounce bottle of Downy fabric softener on sale during April, 2010)
Downy is just one of a number of household products that have undergone aggressive price cuts to attract customers in the recession. The aim among larger brands such as Downy is to win back customers who may have turned to less expensive, alternative brands during hard times. In addition to fabric softener, Procter & Gamble (PG), parent company of Downy, has dropped the prices of a number of products, including batteries, shampoo, and diapers to combat private label brands sold by discount super chains like Target (TGT).
Apple iPhone Apps
Last year: $2.50 (the average price of the 100 highest ranked paid apps in US between Sept. 1, 2009 and Oct. 31, 2009)
This year: $2.15 (the average price of the 100 highest ranked paid apps in US in July, 2010)
Although the prices of all iPhone Apps have not dropped, the average price of the 100 highest ranked apps has gone down by almost 15% as of July, 2010. Part of the reason for this change is that many higher-priced apps have left the top 100. The change also represents a trend of price reductions for many popular apps. With over 250,000 Apple (AAPL) iPhone apps now available, app developers must offer their products at more competitive prices if they wish to attract new users.
Florida Vacation Home
Last year: $137,000 (the average price of a house sold in Orlando, Florida in July, 2009)
This year: $98,000 (the average price of a house sold in Orlando, Florida in July, 2010)
As the housing bubble continues to deflate, home prices have continued to drop. Not surprisingly, housing has tended to fall the most in markets where unemployment is highest. But the average price of homes sold in the entire U.S. dropped 3% from July, 2009 to July, 2010.
Charles Schwab Online Trading
Last year: $12.95 (the price per online trade in September, 2009)
This year: $8.95 (the price per online trade through September, 2010)
In January 2010, discount broker Charles Schwab (SCHW) lowered its price per online trade for customers who have less than $1 million in household assets. This price reduction was necessary for the company to maintain its significant market share and to compete in an industry where other brokers offer trading for much smaller fees. Examples include companies like SogoTrade, which charges customers only $3 per online trade. It also has two very large, and well-financed competitors: TD Ameritrade (AMTD), and E-Trade (ETFC).
Last year: $775 (the average cost of all notebooks, laptops and netbooks in the first quarter of 2009)
This year: $678 (the projected average cost of all notebooks, laptops and netbooks in the third quarter of 2010)
With the cost of laptop components going down, a price war has been sparked among laptop manufacturers. The largest of these companies include Dell (DELL), Hewlett-Packard (HPQ), Lenovo, Asus, and Acer. This war has depressed prices across the board. Also contributing to the drop is competition from the iPad.
It may seem to American families that household expenses only go up, but this assortment of nine big and small-ticket purchases shows that many prices are actually falling quite sharply. That may seem like good news for shoppers. Longer term, however, lower prices may not prove to be such a good deal for the American economy.