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Deflation Is Real, Inflation Is Also Real… Huh?

15 January 2010 3 Comments

The deflation vs. inflation argument is very common these days.  Most believe it’s either or.  I believe that we have and will continue to have both.


There are definition deflationary forces everywhere.  Many people I know are having pay cuts.  Super Bowl ad prices are falling (source).  Heck, I just got 40% off all purchases with my Amex points and took the opportunity to buy a few items that I can’t afford normally.

In the hospitality world where I work my day job, there are definite price battles going on to land business.  It seems like every industry has a shrinking pie and more and more parties reaching for their pieces.  Price deflation is everywhere.  Except…


The problem is that in a wage deflating environment, we’re still having rising prices in certain areas.  These areas unfortunately, tend to fall in the basic necessities category.  For example, gasoline is at new highs for the year.  The monetary policy of our country is contributing to rising prices for commodities.  Furthermore, you have government incentive programs which are propping up the prices of things such as autos and homes.

Stagflation?  Depress-flation?

Whatever you wish to call the combination , it’s not pretty.  Rising prices of certain items combined with continued lower incomes and a stagnant economy is just plain ugly for the average Joe.

I believe we will continue to see a weak “real” economy with high unemployment and plenty of “underemployment”.  We will continue to see price decreases in more discretionary items such as electronics, jewelry, higher end clothes, restaurants, etc.

Meanwhile, we may see stubbornly high gas prices which is terrible for consumers.  We may see high food prices as well as the prices of commodities across the board remain high.

I don’t think we will see the Fed raise rates or stop many of their programs that are boosting the economy.  To do so would result in a deflationary tailspin which is what they wish to avoid at all costs.  The question on the inflation end is whether or not the massive liquidity actually makes it into the real economy.  For now, there is no demand for the money, therefore, it is just sitting in reserves.  While, this is bad because it prevents growth, it is also good because it prevents serious price inflation throughout the economy.

Wherever you stand, I can guarantee that the argument will go on as we are not even close to being out of the woods.

Geez, this sounds complicated.  Why not just get back to sound growth caused by production, innovation, and hard work?  Yeah, right.  Not in the age of the Central Banker.