WhiteBoard Finance: The Great Deflation Is Happening
Some asset prices have come off their highs considerably. That includes tech stocks that are more than 50 percent off their peak. But it can also include the drop in oil prices in recent weeks.
Most investors are still focused on inflation. The pandemic era’s money-printing and government support, combined with a strong jobs market, has been a proven recipe for rising prices. However, with the focus now on lowering inflation, deflation could occur.
In a deflationary market, prices simply tend to drop over time. For those with a fixed salary or fixed income, deflation means more purchasing power.
Meanwhile, when there’s deflation, lower prices can also lead to a number of companies going bankrupt. That can result in higher unemployment.
Deflation tends to occur largely in recessions when demand declines. One hint that we may face deflation is coming from the commodity space. Prices there, particularly in copper, have dropped significantly in the past year.
Deflation could also occur with a drop in money supply or higher taxes, as consumers have less to spend overall.
It will take months, if not more than a year, to see how today’s fight against inflation goes. But if it overshoots, it may result in a strong recession as a price decline spiral occurs.