For more than two years, inflation has remained persistent. Almost everywhere we go, the prices we are charged are becoming increasingly higher, if not at the same shocking pace as before.Thank you for reading this post, don't forget to subscribe!
So is it also possible that we may soon experience the opposite – a sustained decline in prices known as deflation? It seems the head of Walmart, the nation’s largest retailer, thinks so.
“In the U.S., we could be dealing with a period of deflation in the coming months,” Walmart Chief Executive Officer Doug McMillon said on a conference call with stock analysts Thursday. “And while this will put more unit pressure on us, we welcome it because it is better for our customers.”
But how can we suddenly go from inflation to deflation? And if it does, will it be as good as it seems? This is what you and your family need to know as the US economy potentially reaches a turning point.
First, a quick recap. Prices of goods and services rise when there is not enough quantity of them to meet demand. This is what ignited inflation in 2021: Consumers emerging from pandemic lockdowns had more pent-up demand than shortages and supply constraints.
The imbalance became so bad that in early 2022, when the inflation rate was heading toward a four-decade high of more than 9%, Federal Reserve officials intervened. Since people don’t spend as much money when it’s more expensive to borrow, the central bank started raising its benchmark interest rate.
But the main thing is not to go too far and suppress demand so much that the economy shrinks and prices fall. The Fed has made 11 rate hikes since March 2022 — pushing the benchmark to its highest level in more than two decades, according to Cathie Wood, founder and CEO of asset management firm ARK Investment Management.
“The Fed has overdone it,” Wood said on Bloomberg TV earlier this week. “The big risk here is deflation.”
Wood pointed out that commodity prices, as well as airfare and car prices, are already declining and said most people refer to the inflation/deflation rate – how much the overall consumer price index (CPI) rises over a 12-month period. Rises or falls – may very well turn negative, meaning start to fall.
It rose 3.2% in the 12 months to October, slowing from a 3.7% rise in the 12 months to September and a 40-year high of 9.1% between June 2021 and June 2022.
“I think we’re going to see a lot more deflation going forward,” Wood said. “I It would not be surprising to see CPI inflation turn negative at some point next year.
Deflation may be a relief to consumers, but it is generally considered bad for the economy, as the Federal Reserve has certified that 2% inflation is ideal.
Deflation may not only encourage people to hold back on their purchases, but it may also lead to a decline in wages. The last time significant deflation occurred in the US was during the Great Depression in the 1930s, when the unemployment rate reached 25% and wages fell 43%.
Walmart has already rolled back the prices of several holiday toys and said this week it “could lead to a period of deflation in the coming months.” Brandon Bell/Getty Images
The last time any deflation occurred was in 2009, after the start of the financial crisis, but it was “small and mild”, according to research from the Federal Reserve Bank of St. Louis.
Although anything is possible, deflation next year is “an unlikely scenario,” according to Mark Zandi, chief economist at Moody’s Analytics.
“It’s hard to see that happening unless we get hit by another major shock, like another pandemic or NATO being dragged into a war with Russia,” Zandi told The Messenger.
Deflation would mean “businesses and households with debt are unable to pay off that debt because their sales and wages are falling due to deflation,” Zandi said. “As defaults increase, the financial system collapses. It’s an ugly economy.”
Walmart executives told stock analysts that the company has already raised prices on some common items, including toys like the Barbie Malibu House dollhouse, the Melissa & Doug home set and the classic Furby, all of which are items that tend to be popular holiday gifts. Let’s hope for.
Ubiquitous retailers are happy to lower prices, executives said, as long as they can make up for it by selling more of the less expensive items. He said deflation could hit some grocery categories next.
“General merchandise were declining and have declined somewhat more aggressively over the last few weeks or months than the trend prior to that, which we think is a really good thing,” McMillan said. “But it starts to have an impact on the dollar when units don’t go up enough to offset the impact of deflation.”
Deflation should not be confused with the term deflation, which means that overall prices are still rising but not as fast as they were rising.
Right now we have deflation, and even though Wood warns of deflation, other economists say the CPI has been trending in the 3% range since June – even lasting into the summer.
“To say that deflation is on the horizon is the first kind of nonsense,” said Lawrence Kotlikoff, an economics professor at Boston University and a best-selling author of financial advice books. “The problem is not deflation. The problem is that we may be stuck with inflation rates in the 3s for too long.”