MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: Is there any good news on prices?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

I'm a silver lining person. I try to look for good news, especially during times when there appears to be only bad.

And we've certainly had our share of bad news about prices recently. It seems like almost every day this summer gas prices have gone up. It started with the typical increases we see when vacation travel picks up. Then, of course, we've all been shocked at the pump after Hurricane Katrina hit the Gulf coast.

As we've been bombarded with this bad price news, it's easy to wonder if there's any good news on prices. Indeed, as gas prices have climbed fairly steadily during the last five years, haven't they pushed up the prices of virtually everything we buy and consume?

I'm happy to report the answer is a resounding “no.” At the same time gas prices have been rising, the prices of many other consumer products have been falling.

Here's a list – not necessarily comprehensive – of consumer products for which prices actually fell since 2000. The numbers refer to the cumulative price reductions from 2000 to 2005: computers, 47 percent; TVs, 46 percent; toys and VCRs, 27 percent; appliances and cameras, 10 percent; clothing, 9 percent; furniture, 6 percent; new vehicles, 4 percent; and tools and sporting goods, 3 percent.

Almost everything we buy for our homes, drive or wear, came down in price. These price declines are saving the average household more than $700 annually compared to what they spent in 2000.

And the good news on prices doesn't stop here. It's also much cheaper to borrow money today than it was at the start of the decade. Thirty-year, fixed-rate mortgages are down 2 percentage points, saving homebuyers $130 monthly for every $100,000 borrowed. Interest rates on auto loans are lower by 3 percentage points, making $20,000, 36-month car loans cost $30 less per month.

These savings have largely compensated households for the higher gas prices they've had to pay. This is one reason consumer spending has continued to roll on, despite the added costs at the pump.

Why haven't these price declines, and the savings they've created for consumers, received more notice? A big reason is that gas prices are more obvious. They're displayed on every major block and intersection, and we constantly see them as we drive to work, school and shopping centers. Plus, most of us buy gas at least once a week, so they're constantly on our mind.

In contrast, other prices are hidden in stores, catalogues and magazines, and we only know about them if we're actively looking for the product. Also, products like furniture, electronics and even clothes are purchased much less frequently than gas.

Yet won't higher gas prices eventually work their way through these other products and eventually cause their prices to rise as well?

Not necessarily. Although gasoline is a component of most other prices through its impact on transportation costs, its importance is often overstated. The latest data show gasoline costs account for only 5 percent of all spending in the economy.

None of this should be interpreted as minimizing the added burden that both households and businesses face when gas prices rise. Clearly, budgets would be in better shape if gas prices were lower. But some relief has been afforded by the lower prices and costs for many other products we buy.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html