The consumer price index fell 1 percent month on month in October, according to Labor. Falling consumer prices, if they continue, worsen New York’s fiscal position.
It would be comforting to say that one month isn’t a trend, except for these photos of hundreds of German-made cars awaiting transport from the ship straight to the warehouse isn’t an indicator of higher demand for much of anything in the near future. Lower demand = lower prices.
What do these falling prices mean, if they continue? Lots of bad things for the economy, of course, because it means that outstanding credit-card debt, mortgage debt, and all the rest becomes more expensive in real terms for people to pay back. It also means that New York’s fixed-rate debt becomes more expensive in real terms for its taxpayers to pay back.
Falling prices also mean that those raises Mayor Bloomberg generously gave out in recent months and weeks become more expensive in real terms. If prices were to drop 1 percent over an entire year, for instance, the 4 percent raises the city awarded the biggest civilian union and several uniformed unions are really 5 percent raises. The mayor cannot say that falling prices were not known as a very real risk when he awarded these raises. Yes, it’s impossible to know the extent of the risk, but it would have been safer to do nothing.
Falling consumer prices, if sustained, also mean that the city’s tax revenues are likely to drop by more than expected, as well. Retailers are already slashing their prices, for example; these price cuts will come through in the sales-tax collections. As for the income tax: employers are more likely to slash employment than wages, but they’ll cut more workers than otherwise in a falling-price environment. Further, employers are also unlikely to award even small raises in an environment of falling prices, since existing wages will actually be higher relative to prices, anyway. Lower nominal wage growth and more job cuts will also come through in income-tax collections, then.
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