Inflation or Deflation?

[Florida]

Any thoughts as to the possibility of excessive inflation or deflation occuring in the future.

What may they look like if they did occur?

 

[ejman]

Interesting question. The consensus today seems to be that inflation in the US is inevitable with the huge amounts of deficit spending taking place. Of course, the counterpoint is look at Japan, huge deficits - much larger than our own - and they have in fact been in a deflationary environment for a long time. Flip a coin? My own guess is that as long as there is a general feeling that trouble lies ahead, people tend to save and not spend and so, I would place my bets on the Japan model for the future... Until the we get optimistic about the future again - then watch out for inflation!

As to what they may look like Deflation - Japan bad but no so bad
Inflation Argentina (Hope Not!)

 

[M Paquette]

Deflation in the near term...

With the tighter credit and shrinking money supply, we'll likely have net deflation in the near term, the next year or so. Oh, some things like medical expenses will continue to inflate, but between personal and regional business and government belt tightening, there aren't any inflationary pressures, so I would expect the shrinking money supply to lead to slight deflation.

Eventually we may have some inflation. When, and how much, depends on when we see the preconditions appear.

Inflation is, broadly speaking, too much cash in search of too few goods. We are at risk of inflation when we see:
* Industrial production and shipping running near capacity
* a tight labor market, where workers can readily demand and get raises
* high 'velocity of money', a combination of lots of cash around (loose credit), and lots of financial activity (lending and speculative investing).

Currently we really don't have any of these items, and are at least a few years away from seeing any of them.

 

[endthefed]

the greatest collapse since the great depression couldnt produce deflation...

what can?

as long as we have a private central bank...and they dont run out of zeros = no deflation.

reason - sustained deflation hurts banks. banks (jpm, gs, ms, citi, wf, etc) own the federal reserve. soooo, no deflation.

i have the utmost confidence in the fed to create/inject as much money as necessary to avoid deflation (just mouse clicks!)

got gold?

 

[clifp]

I pray for inflation.

The greatest collapse since the great depression has caused deflation.
In the short term I don't see much inflation pressure either in fact just the opposite as people are accepting jobs (when they can find them) at lower wages than they were use and business are having a very hard time raising prices.

Part of the reason I bought bank stocks a couple of years, was because like endthefed I was confident that cozy relation between bankers and the Fed would mean long sustained profits for banks. Obviously we were all wrong,. Despite the best effort of the all bankers in the world to inject money into the system, the increase in the money supply has not been nearly enough to compensate for the even larger decrease in the velocity.

We are even seeing things like Americans (at least the 80% or so with jobs) save money, this is another bad sign of deflation and a significant factor in the 0-1% rates we are seeing.

 

[Nords]

We are even seeing things like Americans (at least the 80% or so with jobs) save money, this is another bad sign of deflation and a significant factor in the 0-1% rates we are seeing.

Luckily the Plunge Protection Team arrived on the scene in time to make a few hedonic adjustments to the CPI to keep it in positive territory...*

I agree that the only thing scaring the Fed more than hyperinflation is a little bit of deflation. Bernanke's probably checking helicopter fleet rental rates right now.

*As Fuego says, "This is sarcasm."

 

[IndependentlyPoor]

At least we are not the only ones flummoxed by this
Op-Ed Columnist - The Pain Caucus - NYTimes.com

 

[youbet]

I pray for inflation.

The greatest collapse since the great depression has caused deflation.

clifp......

Help the economic data challenged among us understand this. The BLS site says we're having inflation with the exception of one or two recent monthly year over year measurements when we had minor deflation. And, more importantly, most of the significant things I spent money on have inflated........ Just recently I paid higher property taxes, higher energy costs, higher grocery bills (much due to smaller package sizes), higher hospitalization insurance premiums, higher medical costs for non-covered items, etc.

Yes, the recession has caused some bargains to pop up in a few areas. We were finding attractive restaurant coupons for a while but they seem to be tailing off now. There were some discounted vacation opportunities. You could have purchased an automobile at a good price during the auto manufacturers worse days. Etc.

Still, at our house we have not been able to cut the budget due to price decreases on life's essentials at all. Lots of talk about deflation, but little evidence for me personally.

What am I missing?

 

[growing_older]

Personally, I am not seeing price deflation that I can use. I am not in the market for a new car or house. My gasoline bills go up or down weekly, but not predictably enough to count on, nor do I buy enough gas to matter much. Food prices are certainly up. Phone service, cable, alarm company, yard work, housecleaning are all up. Kids activities, school fees are way up. Maybe there are price increases and decreases in different areas, but I seem to be living in almost all the increase worlds. I pulled out some old budgets from a year and 2 years ago. Almost every category went up, usually much more than CPI. Those that went down were usually not related to inflation/deflation (for example, newspaper went to zero when I stopped subscribing).

 

[DoingHomework]

My guess is slight deflation though recent government spending will keep it moderate. Though anything from -2% to +2% is meaningless in my opinion because we don't have a good way to measure it in a meaningful way.

Increases in productivity worldwide, notably in China and India will lead to deflation much like the technology boom in the 1800s in the US and Europe did (think railroads and steel). Prices generally declined for something like 50 years.

Note that in spite of deflation we had good corporate earnings growth and profits during that period. We also had periodic panics and other crises. I think those will be avoided now because we have a powerful central bank.

I do not necessarily think the economic climate ahead is rosy but I don't think it will be highly inflationary or deflationary.

 

[haha]

Personally, I am not seeing price deflation that I can use. I am not in the market for a new car or house. My gasoline bills go up or down weekly, but not predictably enough to count on, nor do I buy enough gas to matter much. Food prices are certainly up. Phone service, cable, alarm company, yard work, housecleaning are all up. Kids activities, school fees are way up. Maybe there are price increases and decreases in different areas, but I seem to be living in almost all the increase worlds. I pulled out some old budgets from a year and 2 years ago. Almost every category went up, usually much more than CPI. Those that went down were usually not related to inflation/deflation (for example, newspaper went to zero when I stopped subscribing).

Yes, it's that old favorite of CPI economists- substitution. For example, one can substitute fasting for eating, spirituality for hedonism. Unless of course your chosen spirituality involves a place of worship which must be supported. But that is really no problem either, silent prayer at home can be substituted for churchgoing. Self love or the small capital cost of an appropriate sex toy can be substituted for wasting money on dates with other humans.

So you see, just as our most benevolent and highly esteemed government tells us, the cost of living is actually going down.

 

[Florida]

It seems that eventually we will see inflation but to what degree.
If the dollar weakens prices of non domestic goods, food and oil will rise.
Stocks and real estate too.

But before the inflation I think deflation will stay strong and cause depreciation of assets values.
Maybe not food and medical costs.

So if it plays out that way its woud be best to have cash and a light portfolio today. Buy real estate and stocks on the dips and hold.
Have debt now which would be wipped down when inflation comes.

Any other thoughts?

 

[SilentSwirl]

Any other thoughts?

Stagflation!

 

[IndependentlyPoor]

Stagflation!

Gaack! You had to say it didn't you?

 

[ziggy29]

Whether you're feeling inflation or deflation may depend on whether most of your money is chasing necessities or discretionary/luxury items.

 

[clifp]

clifp......

Help the economic data challenged among us understand this. The BLS site says we're having inflation with the exception of one or two recent monthly year over year measurements when we had minor deflation. And, more importantly, most of the significant things I spent money on have inflated........ Just recently I paid higher property taxes, higher energy costs, higher grocery bills (much due to smaller package sizes), higher hospitalization insurance premiums, higher medical costs for non-covered items, etc.


What am I missing?

I am not sure and certainly not claiming that we are currently seeing deflation. Only we experienced a rare bout of deflation during much of 2008/2009 due to the economic collapse. I am not seeing an increase in grocery cost from say 3 years ago and some case food prices are down (80% of my shopping is at Costco). Energy prices bounce all over the place but $75/barrel oil has certainly lower energy prices than when oil was $125+/barrel.

Medical costs are definitely up and I got hit with big increase for turning 50. In fact, I'd say as group early retirees are going to see big increases in medical inflation for a variety of reasons including the fact we are getting older.

Personally, outside of medical increases, I am finding it easier to get bargains on a variety of things than back 3 years. Of course my assets are down and my income is way down due to lower interest and lower dividend payments so I am definitely worse off. YMMV

 

[M Paquette]

Stagflation!

 

[LOL!]

I can't locate the link, but I read about the prospect of deflation in Europe. It seems the Germans and the ECB's Trichet are deathly afraid of inflation, but with practically every government pushing through austerity measures, no one will have any money to spend which will push prices down to find buyers.

I don't think much of this will travel over the Atlantic though. There is no way we can practice fiscal austerity in the US. Ain't gonna happen.

 

[DoingHomework]

Health care costs are going up because there is greater demand for it. Oil bounces around for irrational reasons so I tend to ignore it as much as possible.

When you look at everything else prices have generally come down over the long term. My core overall spending has changed very little in 20 years. What has changed as I earned more money and paid off the mortgage is that I traveled more, bought nicer luxuries, and saved more.

I actually have a printout of my expenses from 1992 as recorded in a PF program (pre Quicken). When I compare to last year I see very little inflation. I can explain all of my increased spending by lifestyle choices. Our grocery bills were lower last year but we spent more eating out. Now, I admit that I have seen "inflation" because of my choices, it makes me question the government numbers. I don't doubt they are accurate but I not so sure they are relevant!

 

[ejman]

Not a scientific process but since ER in December 2002 my standard of living is about the same and I do the same things i.e. I eat out about as often, travel about as often, I buy about the same things each year etc. And. thanks to the magic of Quicken TADA! expenses are also about the same for the last 8 years ergo no inflation ( and no deflation either). My Health insurance has gone up pretty consistently though... $400 8 years ago, now $600 but my deductible is way up! ( Thank God I've not tested it).

 

[endthefed]

Yes, it's that old favorite of CPI economists- substitution. For example, one can substitute fasting for eating, spirituality for hedonism. Unless of course your chosen spirituality involves a place of worship which must be supported. But that is really no problem either, silent prayer at home can be substituted for churchgoing. Self love or the small capital cost of an appropriate sex toy can be substituted for wasting money on dates with other humans.

So you see, just as our most benevolent and highly esteemed government tells us, the cost of living is actually going down.

haha - you rule! good stuff

 

[haha]

Health care costs are going up because there is greater demand for it.

And in the US, because we have devised and insist on keeping a uniquely dysfunctional health care system.

Ha

 

[traineeinvestor]

My initial reaction to the question was that it feels like we have:

1. an inflationary bias for things which are necessities - like health care, education costs for my children, utilities, housing and a lot of food items

2. a deflationary for things which are strictly optional - like tvs, books

However, it didn't take much effort to come with with a list of optional items for which prices have increased (e.g airtickets, movie tickets, good wine, jewellery, taxi fares). What I couldn't do was come up with many exampels of necessities which have actually decreased. In fact, the only one I could come up with was rates (due to government waivers).

So I guess I fall in the inflationary camp based on personal experience.

Given the generally held perception that deflation is worse than inflation and the ability of central banks to inflate the money supply more or less at will, my expectation is that inflation is more likely than deflation going forward.

As far as the question of whether the selection of goods and services used to calculate CPI results in inflation being understated or not - while there is certainly plenty of room to to be suspicious, I view it as being something of an irrelevancy.

My retirement plan is built around an expectation that my personal cost of living is likely to increase at a rate higher than the average level of inflation because a significant part of my expenses will be weighted towards things which are (i) necessities and/or (ii) subject to price inelasticity and/or (iii) are supplied by monopolies or oligopolies which are not regulated by an anti-trust regulator.

 

[harley]

With the tighter credit and shrinking money supply, we'll likely have net deflation in the near term, the next year or so. Oh, some things like medical expenses will continue to inflate, but between personal and regional business and government belt tightening, there aren't any inflationary pressures, so I would expect the shrinking money supply to lead to slight deflation.

I pray for inflation.

The greatest collapse since the great depression has caused deflation.
In the short term I don't see much inflation pressure either in fact just the opposite as people are accepting jobs (when they can find them) at lower wages than they were use and business are having a very hard time raising prices.

Part of the reason I bought bank stocks a couple of years, was because like endthefed I was confident that cozy relation between bankers and the Fed would mean long sustained profits for banks. Obviously we were all wrong,. Despite the best effort of the all bankers in the world to inject money into the system, the increase in the money supply has not been nearly enough to compensate for the even larger decrease in the velocity.

We are even seeing things like Americans (at least the 80% or so with jobs) save money, this is another bad sign of deflation and a significant factor in the 0-1% rates we are seeing.

I would love to see some statistics backing any of this up. How do y'all determine that we have a shrinking money supply? Didn't the Fed just create a few trillion dollars? Poof? Out of nothing? And government belt tightening? Isn't that like limited nuclear war? Americans are saving money? Geithner Still Claims Savings Rates Are Up. Savings Rates Still Ain't Up. - Hit & Run : Reason Magazine

And I'm especially incensed by the statement "Despite the best effort of the all bankers in the world to inject money into the system". Where do you get that? All I'm reading is about the incredible difficulty individuals and small businesses are having getting credit, due to the banks having received all the bailout money at basically no interest, buying gov't bonds with it at 3+%, and stockpiling the profits.

It sounds like y'all and I are not living in the same reality. Of course, I've had that problem in the past, but I haven't done any of that stuff recently.

 

[FIREd]

Not a scientific process but since ER in December 2002 my standard of living is about the same and I do the same things i.e. I eat out about as often, travel about as often, I buy about the same things each year etc. And. thanks to the magic of Quicken TADA! expenses are also about the same for the last 8 years ergo no inflation ( and no deflation either). My Health insurance has gone up pretty consistently though... $400 8 years ago, now $600 but my deductible is way up! ( Thank God I've not tested it).

Same experience here:

http://www.early-retirement.org/forums/f28/my-personal-inflation-rate-50336.html