Falling Prices Raise a New Fear: Deflation

"A $20 shirt today, that same shirt in 1989 was $20," McMillion said. "That's fairly amazing."

Crude oil prices have also defied expectations. Only a few months ago, oil experts and oil ministers from the Organization of the Petroleum Exporting Countries asserted that prices had reached a new plateau and that high-cost exploration areas would prevent prices from dropping much below $65 a barrel, the approximate cost of extracting oil from Canada's tar sands, the most expensive oil being produced.

But oil prices slipped below that level as consumption around the world stalled or fell. Now companies have announced delays in Canadian tar-sands projects. Last week, Petro-Canada joined Suncor in postponing expansion plans, citing credit market conditions and oil prices.

OPEC plans to meet Nov. 29 to consider output cuts aimed at bolstering prices.

But propping up prices could prove difficult when industrial activity is sagging. Crude steel production for the 66 countries reporting to the World Steel Association was 100.5 million metric tons in October, 12.4 percent lower than in October last year and 6.9 percent below September 2008.The declines were particularly severe in China, down 17 percent from last October, and in Russia, down 27 percent.

"I think that the prognosis for November and December will be more of the same," said Nicholas Walters, spokesman for the association. "That's what we're hearing from the industry."

Used-car prices are also plunging -- down 2.4 percent in October after a 1.8 percent drop in September, according to the government's price report. While that could create bargain opportunities for shoppers, lower used-car prices mean that people hoping to trade in vehicles are also getting lower prices, said Mike Linn, chief executive of the National Independent Automobile Dealers Association. That could make it difficult to pay off loans on the cars and give people less money for a down payment on a shiny new car.

U.S. farmers have also been hit hard by deflationary trends. And it has all happened extremely fast.

This summer, the price of a bushel of corn climbed to about $8, boosted by the growing economy, soaring gas prices that fueled demand for corn-based ethanol and floods in Iowa. Higher corn prices rippled through the economy, nudging up prices on everything from Corn Flakes to steak at Morton's.

But with the economy in a tailspin, prices have crashed. A bushel of corn is now around $4. This week's consumer price index report showed that five of six grocery-store food-group prices fell last month. Fruits and vegetables fell 2.2 percent, on top of a 0.5 percent decrease in September. Dairy fell 1 percent, after a 0.6 percent decline in September.

"It's hard to see any prices that haven't fallen," said Iowa State University agricultural economist Chad Hart.

Some of farmers' costs haven't fallen as quickly, however. Fertilizer prices are still high. So are prices on seeds and insurance for crops. And for corn growers, prices offered by ethanol makers have fallen with gasoline prices.

"They are definitely now seeing that pinch," Hart said. "I would say things are more scary now than in the past."

Some economists argue that what's really causing consumers to hold back isn't the deflation mentality but broader fears about their economic security.

"The issue is less price cutting, it seems to me, than no sales," said Edwin M. Truman, a longtime Fed and Treasury official who is now a senior fellow at the Peterson Institute for International Economics. He said that people were holding back on buying goods today "not in order to spend tomorrow, but because they're worried about having a job tomorrow."