Is the answer to inflation… deflation?

We are all feeling the effects of stubborn and persistent inflation. When the current administration tells us inflation is coming down, we must remind ourselves that only means already high prices are going up slower. When a few large pizzas, some salads, and garlic knots cost you $100, you begin to realize just how expensive life is getting for Americans.  

So, is there any chance that prices will ever come down? The one thing, good or bad, that could make that happen is the D word: Deflation.

What Is Deflation?

Deflation, characterized by a general decline in prices for goods and services, is a stark contrast to inflation. While inflation erodes purchasing power, deflation increases it. However, deflation can signal severe economic distress and widespread economic stagnation. Understanding how deflation can occur in the United States involves a combination of economic factors, policies and external influences.

Key Drivers of Deflation… It’s Me, I’m The Problem?

Decreased Consumer Demand: When consumers and businesses expect prices to fall, they may delay purchases and investments. This reduced demand can lead to an oversupply of goods and services, forcing prices downward. As Taylor Swift says, “It’s me, I’m the problem.” Perhaps the answer is we, as Americans, need to be spending less than we do today.

BIDEN REPEATS FALSE CLAIM THAT INFLATION WAS AT 9% WHEN HE TOOK OFFICE AFTER BEING CALLED OUT LAST WEEK

Technological Advancements: Technological progress can enhance productivity and reduce production costs, so perhaps rapid AI growth could solve our inflation problem.

Monetary Policy: Are the Fed’s current policies too tight? Should they be raising interest rates even though it’s not what Americans want right now? Tightening rates even further might be the solution in part to solving the inflation issue.

Debt Deflation: High levels of debt can lead to deflation if consumers and businesses focus on paying down debt rather than spending or investing. With all of this consumer debt – $1.1 trillion of credit card alone – it could actually help with deflation if it accelerates even faster although some families will suffer greatly.

Global Economic Conditions: Deflationary pressures can also be imported through international trade. A global slowdown or recession can reduce demand for U.S. exports, while cheaper imports can lead to domestic price declines.

BIDEN DISMISSES LOW CONSUMER CONFIDENCE ON THE ECONOMY: ‘WE’VE ALREADY TURNED IT AROUND’

Historical Context

The Great Depression of the 1930s is a classic example of deflation in the United States. During this period, the country experienced severe deflation, with prices falling by nearly 30%. The deflationary spiral was driven by a combination of high debt levels, bank failures and a collapse in consumer confidence. More recently, Japan’s “Lost Decade” in the 1990s serves as a cautionary tale of how prolonged deflation can stifle economic growth. 

None of this sounds good for America, but it may sober people into realizing that prices may remain exactly where they are for a long time, with no chance of coming down.

Potential Pathways to Deflation

Post-Pandemic Economic Shifts: The COVID-19 pandemic led to unprecedented government spending and monetary easing to support the economy. As these supports are withdrawn — meaning the government stops spending money – the potential for reduced consumer and business spending could emerge, especially if confidence in economic recovery wanes.

CLICK HERE FOR MORE FOX NEWS OPINION

Policy Missteps: If the Federal Reserve and other policymakers misjudge economic conditions and tighten monetary policy too aggressively, they could inadvertently trigger deflationary pressures. Conversely, a failure to address high levels of corporate and consumer debt could also contribute to a deflationary spiral.

Global Economic Weakness: Ongoing trade tensions, geopolitical instability, or another global financial crisis could reduce demand for U.S. exports, increasing deflationary risks. A strong dollar, while beneficial for imports, could exacerbate deflation by making U.S. exports less competitive.

Be Careful What You Ask For, You Just Might Get It

Deflation, while seemingly beneficial because we all want lower prices, can lead to severe economic consequences. Inflation will be one of the top items at the polling booth this November. Businesses may reduce production, cut wages and lay off workers, leading to higher unemployment and further reductions in demand. Is that what we are asking for right now?

CLICK HERE TO GET THE FOX NEWS APP

Are we ready for higher unemployment? Are we ready for higher interest rates? Are we ready to STOP spending money? Are we ready for the government to STOP printing money? Or do we all just want to have our cake and eat it too?  

Given everything going on in our economy, deflation is a very unlikely scenario, which means we all need to get used to a sack of groceries costing $50.

CLICK HERE TO READ MORE BY TED JENKIN