Disinflation hurts. It hurts business profits, because companies can't raise prices fast enough to cover costs. It hurts workers, who lose their jobs because companies are unprofitable. It hurts borrowers, who had expected to repay their loans in cheaper dollars. It hurts economic growth, because hard-pressed companies can't afford to expand.
"In less than a year, we have gone from double-digit inflation to actual price declines," says Irwin Kellner of Manufacturers Hanover Trust in New York City. Under present economic policies, he expects disinflation to continue. Those who bet on renewed high rates of inflation might very well lose. Those who bet on greater price stability could come out ahead. Some investment strategies for disinflation:
* Stocks: Slowed inflation will hang many businesses out to dry, especially companies that cannot cut costs quickly. Inflation-hedge stocks -- the oils, other natural-resource companies, the cyclical industrials -- could be disappointing.
Analysts are looking instead at companies expected to gain from lower interest rates (utilities, some banks), lower commodity prices (restaurants, beverages, food processors), and less consumer wealth (consumer nondurables and service companies, rather than durables such as cars and appliances).
But be warned that the business community is still shot through with walking bankrupts, some of which may not survive. Stefan D. Abrams, chairman of the stock-selection committee at Oppenheimer and Co., looks for companies with "strong positions within their markets, premium returns on assets and equity, solid balance sheets with limited need for external financing, and excess cash-generating capacity."
"In the 1960s," said another analyst, "companies made it on volume. In the 1970s, they made it on price. In the 1980s, they will make it on cost control."
* Real estate: A lot of people are holding properties that they cannot sell -- or rather, cannot sell for the price they want. Continued disinflation will eventually force many of these properties onto the market at lower prices.
Over the next year or so, it will pay to rent an apartment and leave your cash in high-interest securities, rather than invest that money in a house or land. Prices will still rise on well-located properties that appeal to wealthy buyers. But the broad trend is running against you.
* Gold: Prices touched a low in June of $295 an ounce, and started up again on fears that the dollar is reinflating. If the downward price trend remains intact, however, gold will not yield a sufficient return to compensate you for the risk of holding it.
* Tangibles: Without substantial reinflation, the broad range of tangible investments -- from diamonds to Tiffany lamps -- are unlikely to recover their values of three years ago.
* Income securities: Disinflationists love today's high-interest notes and bonds. Adjusted for inflation, real interest rates have been touching historic highs. John Rutledge, of the Claremont Economics Institute, says that, "The real interest rate measures the amount of profit that people are losing by owning commodities and tangible assets, rather than interest-bearing securities."
If inflation slows further over the next couple of years, and it appears that price increases will eventually stabilize at a low rate, interest rates will gradually fall. Rates on medium and long-term notes and bonds have already dropped two to three points over the past year. Disinflationists are locking up these rates, on the assumption that they will not be seen again for a long time.
Given the economic uncertainties, many conservative investors are seeking the security of U.S. Treasury issues or, for the tax averse, Triple-A municipals. For super safety, however, you might want to limit your investments to securities maturing in five years or less. It is not impossible that people will rebel against the continuing pain of disinflation, and decide that a little more inflation might not be so bad after all.