Will there be inflation or deflation?

[Scotland2016]

I'll admit I have a very basic understanding of these concepts, so I thought I would ask more knowledgeable Mustachians what they think. It's my understanding big government spending leads to inflation, but I also read the consumer price index is falling which can mean deflation. What do you think?

[slackmax]

I don't know, but I find this very interesting, especially the 'negative interest rate' idea. I don't like the concept, myself. Someone is going to pay me to take out a loan at zero interest? Why? So he will have a supply of dollars coming in later, after everything has deflated, and he can buy everything up at bargain basement prices?
But if you have cash to lend, why not just sit on it until prices deflate, then buy? Is the goal to get people to default on the loans, and then swoop in like a vulture to seize assets? Probably, lol.    (Just guessing here! Not an economist!) 

[Bloop Bloop]

Inflation is the worst thing that can happen to anyone who's careful about investments and who is good at saving. So I'd rather have deflation.

[Scotland2016]

I don't know, but I find this very interesting, especially the 'negative interest rate' idea. I don't like the concept, myself. Someone is going to pay me to take out a loan at zero interest? Why? So he will have a supply of dollars coming in later, after everything has deflated, and he can buy everything up at bargain basement prices?
But if you have cash to lend, why not just sit on it until prices deflate, then buy? Is the goal to get people to default on the loans, and then swoop in like a vulture to seize assets? Probably, lol.    (Just guessing here! Not an economist!)

The negative interest rate thing makes my brain hurt! But I agree the motivation must have something to do with being a vulture, lol.

[Cranky]

Deflation is usually a sign that your economy is circling the drain. So while it may be advantageous to individuals - yeah, prices go down! - governments don't like to see it.

We have an economy built on consuming stuff. If people don't consume stuff, prices go down and there's a whole set of consequences to that.

Meanwhile, it's very unclear what is happening with prices. Food costs are up sharply, but that's not factored in. Energy prices are down, but trending up again.

[Bloop Bloop]

Deflation is usually a sign that your economy is circling the drain. So while it may be advantageous to individuals - yeah, prices go down! - governments don't like to see it.

We have an economy built on consuming stuff. If people don't consume stuff, prices go down and there's a whole set of consequences to that.

Meanwhile, it's very unclear what is happening with prices. Food costs are up sharply, but that's not factored in. Energy prices are down, but trending up again.

Yeah, I know governments don't like to see it.

I've never really understood why people would prefer 4% wage growth and 3% inflation versus 1% wage growth and 0% inflation. It's the same bloody thing isn't it? At least in the latter, you have an easier reference point for prices (since real = nominal) and you avoid menu updating costs.

I know the answer is that having moderate inflation makes it so much easier for wage changes and price changes (since nominal prices are "sticky") and also encourages spending, etc but I still don't like it. I don't like living in a society where the average consumer is "prodded" into spending by the inflation mechanism.

[dresden]

Clearly there is alot of deflationary pressure right now, but despite that some prices notably food - are increasing mostly because of supply chain issues and additional costs (safety measures, temporary pay increases, etc.).

The depression following the spanish flu pandemic was highly deflationary but we aren't an exact parallel.

[Tyler durden]

Deflation - as in long term deflation is the worst outcome we could imagine. Short term its to be expected as buyers reign in spending and sellers drop prices. The FED is going to be VERY aggressive making sure deflation doesn't take hold. That creates a nasty economic feedback loop of ever suffering economic pain. If I recall correctly - deflation caused, at least in part, the depression in the 20s.

No clue where we are going but picking between the 2 evils im all in on inflation. ( makes are debt smaller too )

[Buffaloski Boris]

I reckon both.  Deflation first as people rein in spending and increase their savings.  Inflation later, but that's more of a "maybe" given the low birth rate in most industrialized economies. 

[SwordGuy]

I've never really understood why people would prefer 4% wage growth and 3% inflation versus 1% wage growth and 0% inflation. It's the same bloody thing isn't it? At least in the latter, you have an easier reference point for prices (since real = nominal) and you avoid menu updating costs.

Inflation also makes borrowing cheaper if you have a fixed rate loan.   You pay back with inflated dollars. 

[Paul der Krake]

Nobody knows. Macroeconomics is hard and a frustrating field to study, it seems the more you learn the less you know.

[beltim]

I don't know, but I find this very interesting, especially the 'negative interest rate' idea. I don't like the concept, myself. Someone is going to pay me to take out a loan at zero interest? Why? So he will have a supply of dollars coming in later, after everything has deflated, and he can buy everything up at bargain basement prices?
But if you have cash to lend, why not just sit on it until prices deflate, then buy? Is the goal to get people to default on the loans, and then swoop in like a vulture to seize assets? Probably, lol.    (Just guessing here! Not an economist!)

The negative interest rate thing makes my brain hurt! But I agree the motivation must have something to do with being a vulture, lol.

It’s not anything so sinister. Negative interest rates are just used to encourage banks to lend, by putting a price on holding cash. It’s not fundamentally different from lowering interest rates when they’re positive.

[nereo]

Inflation is the worst thing that can happen to anyone who's careful about investments and who is good at saving. So I'd rather have deflation.

I strongly disagree.  Moderate inflation would be beneficial to those of us holding a fixed-rate mortgage.  In fact, one of the great reasons to hold onto a mortgage is for an inflation hedge.  Inflation (within reason, of course) has also been positively correlated with bull markets; it encourages companies to spend and grow, whereas deflation rewards deferring purchases.  That's a big reason why even moderate deflation (-1%, -2%) can be horrible for an economy, while moderate inflation (+2-3%) is considered the 'Goldilocks zone"

[Bloop Bloop]

Depends on how your debt load compares to your income and your cash on hand to invest, doesn't it? For those of us who have a lot of money in our offset accounts, waiting to be invested, deflation would be useful.

As for markets, the way I see it is that I invest for yield, not for market growth - I don't ever intend to sell the principal. So I'd be happy for a bear market to kick in. I accept moderate inflation is better for overall growth but it might be questionable whether this sort of consumer-driven growth is even a good thing when we have so many resource constraints in this world of ours.

[Cranky]

Modest inflation is general a sign that the economy is growing, though.

[pressure9pa]

A few notes,

The Fed and Treasury is terrified of deflation right now.  Thus they will helicopter money in anywhere and everywhere, which they know is inflationary in the long-term.  They look at the inflation problem as water damage due to the fire department putting out the fire.   This is not necessarily wrong, but you can't ignore the water damage either.

Inflation is troubling for a few reasons.  A key point is that it doesn't hit everything universally.  The classic example is that ~100 years ago, it was the same cost to stay in a luxury NYC hotel for a weekend as it was to make a one-minute phone call from the US to London.  Now that ratio is off by a factor of thousands.  Inflation hurts those who do not own assets.  If you lease your house, your rent goes up.  If you own your home, your mortgage payment is flat in nominal dollars.  Food and energy prices go up.  The poor spend a disproportionate amount of their capital on food and energy. 

So I think the deflation fears for the remainder of 2020 are legitimate, but likely a decade of inflation to follow. 

[American GenX]

I'm seeing very high personal inflation personally at this point.

I'm hoping inflation stays closer to 1% going forward, year over year, definitely not over 2%.

[Scotland2016]

I'm happy so many people have replied. This has helped me understand it a bit better. Thank you!

[stoaX]

Nobody knows. Macroeconomics is hard and a frustrating field to study, it seems the more you learn the less you know.

Ain't that the truth!