Friday, May 1, 2020

Is Price Inflation or Price Deflation Ahead?

Brian T. emails:
Hi Bob,

I generally like Mish Shedlock.

He seems to think deflation is more of a concern. Care to discuss?

See here:
RW response:

Well, I don't want to single out Mish because his view is very common, including amongst some Fed members and some commenters under the posts here at EPJ, but Mish probably most succinctly and clearly makes the price deflation case, so let's take a look at his key point:

[Tim] Duy cited this interesting point from the recent Fed Beige Book of economic conditions. 
No District reported upward wage pressures. Most cited general wage softening and salary cuts except for high-demand sectors such as grocery stores that were awarding temporary “hardship” or “appreciation” pay increases. 

Deflation Summation

  1. Demographics
  2. No wage pressures
  3. Falling demand
  4. Anemic rebound
  5. Eurozone basket case supports the dollar
I find it amusing that people get huge inflation worries out of that mix.
The confusion here is to think that you can't have a wrecked economy and price inflation. This is denying reality. We have had it before in the late 1970s to early 1980s, it was called stagflation.

As far as the supposed no upward wage pressures, the damn economy is shutdown!

I have made clear price pressures are going to occur only for the things we want to buy and Mish and Duy show that this is exactly where wages are climbing now even with a general lockdown, wages are increasing in
 high-demand sectors such as grocery stores that were awarding temporary “hardship” or “appreciation” pay increases. 
I have reported here on the very rapid increases  in prices of beef, eggs and pork. This is what we want now and this is where the bottlenecks are, which is causing the price pressures in these sectors.  But I also note in the EPJ Daily Alert that these are not the only sectors likely facing distribution problems. Remember the lockdown is across the economy and there are very likely supply disruptions in many sectors that aren't getting the coverage the agriculture price spikes are getting.

For example, black market hair cuts cost two to three times what pre-lockdown hair cuts cost.

In other words, we are seeing a collapsing economy, millions upon millions of unemployed and we are seeing soaring prices now, even before the lockdown is ended.

The Mish deflation summation has nothing to do with whether we have price inflation or deflation.

Demographics have nothing to do with it and neither does an anemic rebound. I repeat this is denying the possibility of stagflation or even the fact of what currently is going on in Venezuela

There is "falling demand," as a matter of fact, zero demand in Venezuela for most goods and services but the inflation is out of control for the things people need to buy.

Toilet paper is still in demand:

Does this look familiar?

Venezuelan inflation is somewhere around one million percent while unemployment is around 44%.

Let me repeat, a wretched economy, super high unemployment and only demand for a few products does not in any way eliminate the possibility of high price inflation. To think it does is being blind to reality.

I find quite interesting the claim that "no wage pressure" is listed as a deflation claim. Again the nation is shut down but replacing the "no wage pressure" is the US unemployed who are getting more money sitting at home than working as a result of a combination of state and federal payouts that in one way or another will be financed by Fed money printing.

The "euro basket case" also is not a deflation factor. All currencies are in a race to the bottom, prices may climb by 10% in the eurozone which may mean only 7% price inflation in the US but it is not a case for deflation.

To be sure, there is the potential for a lack of price inflation when there is a strong demand for cash, especially in times of uncertainty, but that desire eventually disappears when there are supply bottlenecks and mad money printing, again see Venezuela which offers more uncertainty than anywhere.

In the US, there may be a bit of an increased desire to hold cash balances right now but as I point out in the ALERT, the Fed is printing a massive amount of new money right now. It is now at levels that it is pretty much impossible for it to not leak out into the economy.

I hasten to add, I am not forecasting Venezuelan price inflation here but I conservatively expect price inflation to eventually, after the lockdown is over, to hit 5% to 7%. And I also want to point out what I have said from the start of all this, it may take government indexes a few months to catch up to measuring the price inflation since the indexes will measure declines in prices of things no one is interested in buying such as cruise tickets at regular prices. But for the things we want to buy, prices are headed much higher and a weak economy would not prevent that given the massive amounts of new money the Fed is pumping into the system.



  1. I agree with what you say in this discussion and the possibility of stagflation and inflation in specific items. What about number 5 talking about the dollar getting stronger because it is the reserve currency of the world? This is the dollar swap line argument going on. That there is a bigger demand for dollars than supply so the dollar gets stronger?

  2. George Selgin also believes that inflation is not the worry...