So often we hear people warning about the dangers of inflation, and that by creating more money, the fed could bring about “hyper inflationâ€. When people say, “but wait, there is very little inflationâ€, often the reply is “just keep printing more money, and you will see the worst ever!â€. But is all inflation bad? What about deflation? Let’s examine some important areas and how they are affected by inflation.Home Prices
Across the country, home prices are off more than 30% from peak in most major markets, and off more than 50% from peak. In other words, home prices have deflated more than at anytime in our lifetimes. There are hundreds of thousands of home loans that are “under waterâ€, meaning more is owed than the house is worth. Inflation of home prices would solve this problem. There are not too many banks or home owners that want to see prices drop any more.
Oil and Commodities
Gasoline is now about a dollar more than it was last year. Much of the oil coming out of the ground today costs about $10/barrel, yet the price of oil is about $100/barrel. The price is high due to fear of future shortages, and speculators who have been able to manipulate the market. Oil companies are making massive profits right now, as are oil rich nations in the Middle East and elsewhere. As a percentage of income, the middle class is spending 20% more on gas than they were last year. Deflation is something most would welcome.
Wages and Prices
As there has been such a focus on low prices, such as Walmart being the “Low Price Leaderâ€, the price of consumer goods has overall stayed very low. It has been very common over the years for small businesses located near the site of a new Walmart store to go out of business, because they could not compete with the low prices. What many people fail to recognize is that as prices remain low or even deflate, there is less revenue circulating in the economy to pay for wages, so wages tend to follow prices. As we have inflation in prices, we have inflation in wages. A focus on quality and efficiency versus quantity can have an effect on this dynamic. Most people would like to see wages increase, but not prices.
Healthcare
Of course we have seen 10%+ inflation on healthcare for the last decade, and most people would agree we want to see deflation of the cost of healthcare. Americans have too much sugar and fat in their diet. If only they could be convinced of the benefits of changing their diet!
Final Points:
It’s really all relative, but inflation is not always a bad thing. We would love to see wages for the middle class “inflateâ€, as well as get prices on homes increasing again so there would not be so much consumer debt. With less debt, people could afford more quality products driving up wages, as consumers choose superior products. As for healthcare, this is one area where the “overall†cost could be deflated by consumers choosing superior products (not just cheap “fast food). And finally with energy and commodities we would all like to see the cost kept lower, especially when markets are being manipulated, but again by choosing superior products that last longer or are more efficient, there is less use of resources.
So keep inflation and deflation in perspective. A lot more could be said on this issue, but keep in mind there are benefits to both depending on the situation. I purposely did not include government spending and the impact on inflation versus efficiency and productivity, but I cover that later this week.