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Inflation or Deflation? What’s The Evidence Say? You Decide.

13 April 2010 No Comment

The inflation vs deflation debate continues.  I feel like I read an argument presenting both sides every single day on sites like Zero Hedge.  It typically goes something like this:

Inflationist: We’re printing money like crazy.  It will end in massive inflation.

Deflationist: It doesn’t matter how much money you print if it doesn’t get into the economy, there’s no inflation.

Inflationist: What do you call oil at $85 a barrel?

Deflationist: What do you call housing down another 10%?

The reality is I’m not sure where we’re headed.  The reality is that I see signs of both inflation and deflation.  Let’s look at the evidence:

Potential Real World Evidence For Inflation

  1. Rising oil prices – as of writing, we’re over $87/barrel – accompanied by higher prices at the pump
  2. High gold and precious metals prices
  3. Dow Jones near 11,000?
  4. Rising movie theater prices (source)
  5. Rising electric bills

Potential Real World Evidence For Deflation

  1. Housing bust
  2. Continuing discounts for car sales from all major auto makers
  3. Massive restaurant discounts – 2 for $20 deals seem rampant
  4. Growing $1 menus at fast food restaurants like McDonald’s

There are plenty more examples of both inflation and deflation in the real world.  Add them in the comments below if you have examples.  The above lists are just a starting point for discussion purposes.

As I said above, I’m not sure where we’re heading but I haven’t given up on the idea that we might have both inflation and deflation; inflation in the necessities such as energy and food, deflation in the luxury, non-necessities like large homes, autos, boats, restaurants, etc.

Can You Prepare For Both?

How would you go about preparing for both?  If you buy gold for inflation, you’ll get killed in a deflationary environment.  If you hold cash for deflation, you could get wiped out in a high inflationary environment.  So, what’s the answer?  The best protection against both might be sound, well-established companies that can do well in a serious recession or depression.  Companies like McDonald’s Corporation (MCD) and Wal-Mart Stores, Inc (WMT) come to mind.  The stocks pay a dividend, will keep up with inflation, and will do well in a tough economy.

Diversification is probably your best bet.  A diversified approach with sound, dividend-paying, defensive stocks, some cash, and some precious metals might be your best answer.  If you can time some of your purchases, even better.  For example, in a major correction, load up on shares and ounces of gold/silver.  As stocks and metals rise, accumulate cash.  Like most things in the world of investing, easier said than done, right?

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  • simple in france said:

    Look at medical expenses and insurance premiums–there was one year (2004?) when those went up 18%. Food is also not counted in inflation. Here in France, another place we feel the pinch is car repairs! Seriously–ouch. Basically, the French never stop complaining about rampant inflation–it's quite real and salaries are not catching up.

    As for that housing crash in the US–did you happen to notice that rents did NOT go down, but actually up? Here in France the real estate bubble wasn't so huge, so prices are down, but not that much.,

    I argue for inflation.

  • Jon said:

    The answer is easy. By your examples you are citing evidence of inflation using "long term" factors. You also cite evidence for deflation using "short term" factors. Therefore , over the long term there is a huge net inflation and this year there are many deflationary factors.

  • Hope to Prosper said:

    First, I agree with Jon that the environment is inflationary long-term. That fact that real estate is down after an insane bubble or that cars aren't selling in a recession is just common sense, not deflation. Not only is there inflation, in the 4-5% range annually. This is being systematically under-reported by the Government, because they have changed the way inflation is calculated. Basically, it's the Government's sneaky little way of stealing from everyone who owns a dollar. The problems with this are that real-wages are flat for the working class and people on fixed incomes are losing their purchasing power.

    What is really going to be important are the costs of commodities and services. It's very hard to tell if the rising costs of commodities, such as oil and gold, are caused by demand, speculation or market manipulation. I suspect all three. And, if we hit peak-oil in the next couple of years, most prices will skyrocket. The cost of services, such as education and medical, are far outpacing inflation. I suspect these will correct in the near future. The economy is already buckling under these costs and they cannot continue to rise.