Inflation - especially when elevated - can be devastating, especially to the poorest in society. It can also enrich the wealthy, those with assets like stocks and property. The world decried sharply higher prices globally mostly caused by the Covid supply-chain disruptions and war that impacted global commodity prices. Now politicians PROMISE us lower prices. That sounds great! But be careful what you wish for.....
When prices go down, it's called DEflation and while I too would love to pay less for almost everything, here is a better understanding of what deflation often delivers: it often leads to a decrease in spending, investment, and economic growth....which can also lead to higher unemployment and make it harder to repay debts. Around 68% of US GDP is consumer spending: when people expect prices to fall, they may delay purchases, which can decrease demand. If they lose jobs, they spend less too. This consumption decrease may compel businesses to cut prices to stay competitive...or in business at all which leads to lower profits and reduced costs. The first thing most corporations do to cut costs? Lay off staff or cut wages. Businesses may hire fewer people, which usually leads to higher unemployment. Imagine a neighborhood where houses were all worth around $500,000, now worth closer to $450,000. Good for buyers, but what about owners?
Deflation also increases real debt burden, which can make it harder for households and businesses to meet their payment obligations. (Today if you owe $10,000 but the buying power of those dollars RISES to $11,000 due to deflation.....) We saw how inflation started to spiral upwards.....well, deflation can lead to the opposite: a deflationary spiral, where falling prices make the economy weaker and this can even cause a recession. We saw the price-gougers taking advantage of rising inflation (because they could get away with it....till they couldn't) when prices are dropping, some people undercut prices to be first in line for that sale....UN-greed-de-flation?
The upside of deflation? Interest rates are usually lowered to stimulate spending..... so, now that you know this, what would you prefer: higher mortgage rates and a robust economy, or low rates due to unemployment and a weak economy?
NEVER easy....
Until next time. Have a great weekend!
Par and Chip
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