Sunday, 19 October 2008

Inflation and deflation, what is the difference

I've heard a lot of chatter that the world is about to enter a deflationary vortex, with all its recessionary implications. Well, a recession is certainly possible, I'll give you that. But deflation?

The US went through a decade of falling prices during the 1930s. The consumer price index for period between 1921 and 1940 is illustrated above. As you can see, prices fell heavily, particularly after 1930.

However, consumer prices in the US over the last two decades have risen more or less continuously. In fact, prices in 2008 are up about 35 percent compared to 1998.

Deflation is a rare thing, particularly when our central banks are run by such irredeemable inflationists like Bernanke and Greenspan.

6 comments:

cws said...

spot the difference.....

Anonymous said...

Alice,
The policy decisions of the UK are entirely predicated from deflation. If you are right, and inflation does persist to next year, then there is no housing problem given the huge injection of funds from the government and we will be in for a dramatic sustained inflationary spiral.
However, how can there be an inflationary spiral when all the major asset prices are falling. I also think all this ends with chronic inflation, but my view is that deflation comes first. When prices do eventually bottom then we will see. But not now.
Interestingly, Japan has had their first major sniff of inflation recently, and I think that they will go straight into major problems from inflation as savings are unlocked. We will see about that I suppose.
I believe that in the UK people are confusing inflation with becoming poorer. The reason food prices have gone up is not because of inflationary policies, but rather because the pound has lost value and we import 40% of our food supply. I realise you might see lowering inflation rates as inflationary but as borrowing has collapsed this isn't the case.
The point of the debt deflation argument is that perversely, any attempt to pay down your debts (through asset sales flooding) increases them (through value write-downs on your remaining assets), if this is the situation we are in then we are looking at right-downs for several years, right-downs above and beyond the stimulation policies of the government.

Anonymous said...

Don't confuse inflation with change in prices.

Inflation is an increase in the total amount of money and credit.

Price changes are a consequence (not inevitable) of this.

You need to think of the concept behind inflation. i.e. How does it work, in terms of transferring savings when there are no cash savings?

Inflation does not destroy wealth - it merely transfers it.

That is the crux of the matter.

Anonymous said...

Mmm. I guess if prices can go up 35% over ten years, they can also go down 35% over ten years.

B. in C.

Nick von Mises said...

Well, inflation DOES destroy wealth in the indirect sense that it gives false signals to entrepreneurs so they misallocate capital which ultimately reduces productivity and thus wealth.

But indirect, so literally-speaking anon is right.

London estate agent said...

I would love to see the same numbers for the UK. Alice?????