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Low Prices – Too Much of a Good Thing?

Julia A. Peloso-Barnes of Morgan Stanley Wealth Advisors
Julia A. Peloso-Barnes of Morgan Stanley Wealth Advisors Photo Credit: Contributed

NEW YORK -- Maintaining stable prices is one of the three pillars of US monetary policy. Although commonly associated with inflation, price stability also seeks to manage lowflation, or worse deflation, which is just as disruptive to a growing economy.

Measuring the Impact of Falling Prices

The U.S. economy had two periods of sustained price declines in the past 100 years. From late 1929 to early 1933, prices fell at an annualized rate of 8.7%. From the middle to the end of 2008, prices fell at an annualized rate of 10.3%. These price declines marked two severe economic contractions, the Great Depression of the 1930s and the Great Recession of 2008-2009.

The average consumer who learned about The Great Depression in high school, or more recently, watched news accounts of Japan’s economic meltdown beginning in the mid-1990s, understands why deflation can send an economy into a downward spiral. But what is so bad about lowflation, especially as the effect has been low interest rates, and a price decline in some everyday goods and services, such as gasoline?

According to Morgan Stanley economists, lowflation marks the point at which prices are rising at well below the Federal Reserve’s target inflation rate for months, even years, persistently teetering on the edge of deflation. At this level, lowflation can exert its own steady, downward pull, all the more insidious because it can be so low-key and off-the-radar. Economists have mapped out three major side effects from lowflation: the higher cost of repaying loans for those who hold a lot of debt; the inability to cut real interest rates when nominal rates are near, or at, zero; and the damage to central banks’ credibility as they fail to meet inflation targets and start to run out of policy options.

Economic growth may return to historical levels as the US economy continues to recover its footing in the aftermath of the Great Recession. In the meantime, we can expect additional central bank intervention, domestic and foreign.

Have you re-evaluated your saving and investing program to take into account the current economic policies and the risks posed by low prices? Let me help you assess the situation and weigh the alternatives.

Source: Wealth Management Systems Inc. Calculations made from published monthly CPI from the Bureau of Labor Statistics: November 1929 = 17.3, May 1933 = 12.6, July 2008 = 219.964, December 2008 = 210.228.

If you’d like to learn more, please contact Julia A. Peloso-Barnes, CFP®, CPM®, ADPA®, CPRC® at (914) 225-6391, or

Article by Wealth Management Systems, Inc. and provided courtesy of Julia A Peloso-Barnes.

The author(s) are not employees of Morgan Stanley Smith Barney LLC ("Morgan Stanley"). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley.

Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

Julia A Peloso-Barnes engaged Daily Voice to feature this article.

Julia A. Peloso-Barnes may only transact business in states where she is registered or excluded or exempted from . Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Julia A. Peloso-Barnes is not registered or excluded or exempt from registration.

© 2015 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 1232482 06/16

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