Tuesday, January 12, 2010

This is not deflation

I still see plenty of people worrying about deflation, but they need to look at charts like this and chill. Deflation is when all prices fall. When housing prices fall and rents fall and stores offer incredible bargains, that is not deflation; it's a change in relative prices. Firms that suddenly find that demand for their goods and services has collapsed must lower their prices if they are to stay in business. Meanwhile, the prices of virtually all commodities are going up. These two charts are just a sampling of what I could show, but both of these happen to show prices up over 100% from the lows of late 2008 and early 2009. You might say that lower housing prices are freeing up money that is instead being spent on higher energy costs.


septizoniom said...

is it true that the price of all things fall in a deflation? what about the price of money or money like things?

Scott Grannis said...

Deflation is defined as a generalized decline in prices. It could also be defined as a situation in which the price or value of money rises relative to goods and services; when a dollar buys more instead of less of a large basket of goods and services.