A 99-Cent Hamburger Isn't Deflation

What the economy needs is a little inflation. Instead, prices in the U.S. seem to be headed still lower over the next few quarters. And that raises the troubling potential of actual, Japanese-style deflation and economic stagnation.

That's my summary of the just-released minutes from the Sept. 24, 2002, meeting of the Federal Reserve's Federal Open Market Committee, the body that decides to raise or lower short-term interest rates. It cut rates 50 basis points one week ago.

But while the Federal Reserve is worried about the potential for deflation across the entire U.S. economy, many individual companies are already coping with actual deflation. Mix this "local" deflation with high levels of corporate debt and you create potential time bombs ready to blow up on investors.

Economywide, deflation may or may not arrive. But local deflation is already very much with us, and investors can see it at work in companies as varied as McDonald's, General Motors and Cisco Systems. Consider the following three industry examples.

Fast-food Deflation

Anybody who's been to a McDonald's(MCD Quote) or a Burger King lately knows what I'm talking about. In September, Burger King, a unit of Diageo(DEO Quote), started a price war when it began selling 11 menu items, including its bacon cheeseburger, for 99 cents each. McDonald's responded almost immediately by creating its Dollar Menu of eight items. It also upped the stakes by including two of its heftiest sandwiches, the Big 'N Tasty and the McChicken, which had previously sold for $1.99.

You want to argue that this is evidence of a coming deflationary cycle, be my guest, but I see two tired companies that have been unable to differentiate their products engaged in a price war because they can't think of anything else to do to revive sales. Even cutting prices in half doesn't seem to have done much for demand. McDonald's same-store sales climbed a whopping (pun intended, please) 1.3% in October after dropping 2.8% in the September quarter.

< Previous

1 2 3 4 5 6

Next >