Inflation & Deflation – a Mutual Support Story

One of the debates du jour is whether we are facing a period of inflation or deflation. The reality is both.

In simple form, items such as oil, food, etc. will go up in price – inflation. This results in a transfer of purchasing power/wealth from the consumers to the producers (and speculators). As consumers re-allocate purchasing power between assets (ex. from home improvements to gas for the SUV) the losing asset declines in value – deflation.

Meanwhile, the sellers with the increased purchasing power will look to employ their new wealth somewhere and preferably not in a deflating asset – so some goes into increasing the supply of items in demand (new oil fields), some goes into speculation (buying oil futures), but some into consumption and some into investments that are perceived to be high quality – causing inflation in those assets.

So you have increases in food and fuel prices (inflation) and declining demand for blue-collar and middle-class vacation homes (deflation) and higher demand for penthouses and yachts (inflation) and class-A real estate investments.

After all, this is at best a zero-sum game. The pie isn’t growing. We’re simply talking about taking some of the pie filling and moving it from one person’s slice to another person’s. Some end up with crust, some with stomach aches.