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Originally published Wednesday, November 8, 2006 at 12:00 AM

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Analysis

"Wal-Mart effect" could lasso inflation

A simple jar of baby food might not say much about the state of the economy, except when Wal-Mart is involved. The world's biggest retailer...

The Associated Press

NEW YORK — A simple jar of baby food might not say much about the state of the economy, except when Wal-Mart is involved.

The world's biggest retailer has slashed in half its price for some Gerber baby food, a bold move that no doubt is welcomed by many parents.

It's also symptomatic of what's shaping up as a bruising brawl likely to break out among retailers nationwide as Wal-Mart tries to re-ignite sales growth at its stores.

In a roundabout way, Wal-Mart's woes also could turn out to be good news for the economy. As it aggressively cuts prices, and rivals are forced to follow, inflationary pressures could weaken.

That could be a welcome sign to the Federal Reserve, whose policymakers raised interest rates 17 times the last two years, trying to control inflation by slowing the economy.

They left rates unchanged at the last three meetings, hoping they'd done enough.

With oil and gasoline prices sharply retreating in recent months, a Wal-Mart-induced price war could further deflate costs in categories like toys, electronics and food. That could offset the significant slowdown in productivity growth and the rising wage pressures that could push prices the other way.

The baby-food promo has nothing to do with Wal-Mart's holiday plans, but it does show how the retailer is anxious to build traffic at its stores and take drastic measures to make that happen.

By knocking down the Gerber food from 52 cents to 25 cents a jar last month, analysts say, the hope is shoppers would also buy other items with higher profit margins.

It's the same kind of thinking that went into Wal-Mart's recent decision to cut prices on some generic drugs to $4 for a 30-day supply. Those deals were not only intended to woo shoppers but to capture sales from drug retailers that had stolen some of its business away.

For instance, discount drug chains in the Great Lakes region were pricing carbonated soft drinks well below Wal-Mart. Then they started offering cheaper items like aspirin and laundry detergent that consumers scooped up, said Burt Flickinger, managing director of the New York retail consulting firm Strategic Resource Group.

"The consumer who in the 1990s thought of Wal-Mart as the low-priced leader every week has discovered it is often the higher-priced leader many weeks," Flickinger said. "They started thinking 'Do I need to drive to a Wal-Mart to save money?' Not really."

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But clearly Wal-Mart will return to its roots this holiday, and other retailers will likely have to follow its lead if they want to avoid being trounced by Wal-Mart's deals.

That's good news for consumers, but probably not for investors who will watch profits get crimped should retailers cut prices more aggressively than planned.

Wal-Mart has to use the price gambit because its other strategies have failed in recent months. It stumbled in targeting more upscale shoppers, moving into trendier fashions and shifting its advertising away from a low-price focus. A belated drive to remodel aging stores also didn't help.

Its missteps were apparent last week, when it reported an anemic 0.5 percent rise in October sales at U.S. stores open at least a year. That was the retailer's worst monthly performance since December 2000, when the economy was on the cusp of recession.

The results fell far short of the company's original forecast of 2 to 4 percent gain and even down from its revised estimates for about a 1 percent increase.

Wal-Mart is forecasting same-stores sales will be unchanged in November from a year ago, a terrible outlook for the discount chain as it heads into the holiday season where it claims nearly a third of its sales and profits.

Already, Wal-Mart cut prices on more than 100 toys, games and nearly 100 electronics. It is touting a $398 laptop computer in its current weekly circular — a similar item to what it offered the day after Thanksgiving last year — as well as Panasonic 42-inch HD plasma TVs, slashed to $1,294 from $1,794.

Wal-Mart executives said in October that they planned to roll back prices on 10,000 items this holiday season. Some analysts think the retailer might have to make deeper-than-expected cuts or add other products to that list to boost sales.

Those merchants most vulnerable to such promotions are its rival discount chains Target and Kmart, which is part of Sears, consumer-electronic retailers including Best Buy and Circuit City, and toy merchants like Toys "R" Us.

Wal-Mart's rival retailers, consumers or investors in the sector shouldn't be the only ones watching how this holiday season plays out.

Anyone who needs to borrow money — for mortgages, school loans, etc. — should keep close tabs, too. Future interest rate moves could depend on it.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org

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