Related Articles
Weareall feeling the effects of stubbornand persistent inflation.When the currentadministration tells us inflation is coming down, we must remind ourselves that only meansalready high pricesare going up slower. Whenafew large pizzas, some salads,and garlic knots cost you $100, you begin to realize just how expensive life is getting forAmericans.
So, is thereany chance that prices will ever come down? The one thing, good or bad, that could make that happen is the D word: Deflation.
What Is Deflation?
Deflation, characterized byageneral decline in prices for goodsand services, isastark contrast to inflation. While inflation erodes purchasing power,deflationincreases it. However,deflationcan signal severe economic distressand widespread economic stagnation. Understanding howdeflationcan occur in the United States involvesacombination of economic factors, policiesand external influences.
Will prices ever come down? (istock)
Key Drivers of Deflation… It’s Me, I’m The Problem?
Decreased Consumer Demand: When consumersand businesses expect prices to fall, they may delay purchasesand investments. This reduced demand can lead toan oversupply of goodsand services, forcing prices downward.As Taylor Swift says, “It’s me, I’m the problem.” Perhaps theanswer is we,asAmericans, need to be spending less than we do today.
TechnologicalAdvancements: Technological progress can enhance productivityand reduce production costs, so perhaps rapidAI growth could solve our inflation problem.
Monetary Policy:Are the Fed’s current policies too tight?Should they be raising interest rates even though it’s not whatAmericans want right now?Tightening rates even further might be the solution in part to solving the inflation issue.
VideoDebtDeflation: High levels of debt can lead todeflationif consumersand businesses focus on paying down debt rather than spending or investing. Withall of this consumer debt – $1.1 trillion of credit cardalone – it couldactually help withdeflationif itaccelerates even fasteralthough some families will suffer greatly.
Global Economic Conditions:Deflationary pressures canalso be imported through international trade.Aglobal slowdown or recession can reduce demand for U.S. exports, while cheaper imports can lead to domestic price declines.
BIDEN DISMISSES LOW CONSUMER CONFIDENCE ON THE ECONOMY: ‘WE’VE ALREADY TURNED IT AROUND’
Historical Context
The Great Depression of the 1930s isaclassic example ofdeflationin the United States. During this period, the country experienced severedeflation, with prices falling by nearly 30%. Thedeflationary spiral was driven byacombination of high debt levels, bank failuresandacollapse in consumer confidence. More recently, Japan’s “Lost Decade” in the 1990s servesasacautionary tale of how prolongeddeflationcan stifle economic growth.
VideoNone of this sounds good forAmerica, but it may sober people into realizing that prices may remain exactly where theyare foralong time, with no chance of coming down.
Potential Pathways to Deflation
Post-Pandemic Economic Shifts: The COVID-19 pandemic led to unprecedented government spendingand monetary easing to support the economy.As these supportsare withdrawn — meaning the government stops spending money – the potential for reduced consumerand business spending could emerge, especially if confidence in economic recovery wanes.
CLICK HERE FOR MORE FOX NEWS OPINION
Policy Missteps: If the Federal Reserveand other policymakers misjudge economic conditionsand tighten monetary policy tooaggressively, they could inadvertently triggerdeflationary pressures. Conversely,afailure toaddress high levels of corporateand consumer debt couldalso contribute toadeflationary spiral.
VideoGlobal Economic Weakness: Ongoing trade tensions, geopolitical instability, oranother global financial crisis could reduce demand for U.S. exports, increasingdeflationary risks.Astrong dollar, while beneficial for imports, could exacerbatedeflationby making U.S. exports less competitive.
Be Careful What You Ask For, You Just Might Get It
Deflation, while seemingly beneficial because weall want lower prices, can lead to severe economic consequences. Inflation will be one of the top itemsat the polling booth this November. Businesses may reduce production, cut wagesand lay off workers, leading to higher unemploymentand further reductions in demand. Is that what weareasking for right now?
VideoAre we ready for higher unemployment?Are we ready for higher interest rates?Are we ready to STOP spending money?Are we ready for the government to STOP printing money? Or do weall just want to have our cakeand eat it too?
Given everything going on in our economy,deflationisavery unlikely scenario, which means weall need to get used toasack of groceries costing $50.
CLICK HERE TO READ MORE BY TED JENKIN
Ted Jenkin is CEO and co-founder of Oxygen Financial and president of Exit Stage Left Advisors.
