Deflation is upon us

Inflation limits your buying options.

Deflation increases them.

Inflation makes the dollar in your hand worth less relative to the goods & services you may wish to consume.

Deflation makes it worth more.

What most people forget is that neither inflation nor deflation ever work uniformly across an economy. Different sectors of an economy - and even individual businesses (and thus individual products and services) all respond to the same inflationary/deflationary forces in a staggered manner, with prices in one sector increasing/decreasing before other sectors are affected.

Various governments have verbally committed themselves to "fighting deflation" (why? - but that's another story...).

The point of my present article is simply to show that deflation has already set in, and quite strongly so.

Oh - perhaps the "feds" will successfully "fight deflation", and bring inflation back online. But it'll take a while. And in the meantime, deflation is here, and some places in a big way.

Example : Flights from Melbourne, Australia to Auckland, New Zealand - cost around $550 return just 12 months ago (purchased in advance, low season). Today, all taxes, fees and surcharges inclusive, you can buy the same flight for $254. The cheapest I ever saw such flights was around $450 - and that was ten years ago. So $254 return is practically unheard of.

But that is only representative of an incredible collapse in flight prices across the board. A year ago one would not have imagined such cheap flights - cheaper than I have ever previously seen.

Every airline is participating.

This means that the purchasing power of the Australia dollar has increased relative to the services offered in one sector of the Australian market. And not a small increase either - up to 100% increase.

This is powerful deflation.

Retailers are seeing fewer customers.

Their response?

Run more sales, give bigger discounts.

The effect?

The same dollar can now buy more.

Or stated more technically : "The purchasing power of the dollar has increased."

In a word : deflation.

House prices are lowering. Oh - in Australia, they've been hit (so far) very mildly - but decline they have. Maybe only around 5% across the board. But what is this? Fewer Australian dollars are required to purchase an Australian house.

i.e. the purchasing power of the Australian dollar has increased.

i.e. deflation.

Note that deflation hits different sectors of the economy at different rates. Flights : 50% deflation. Houses : 5%. And individual suburbs will vary - some have (reportedly) even increased in value.

In other words : deflation is inherently non-uniform. It works its way across the economy in fits and starts.

But it definitely is here.

And in a big way.

And it'll take a mighty big "stimulus" from governments to stop it. (But again, why not let it run its course, instead of "fighting it"? - but that's a story for another day...)

And if the governments do succeed in creating such an immense stimulus in the short term that a massive tide of deflation is reversed... then we will overshoot heavily into inflationary territory. Or so I speculate...

At any rate, it's kinda fun to watch... :o)