*** To put it another way, the war between inflation and deflation is still going on. Inflation is in the news so much that you might think it has won. Just look in the papers; you can practically see the victory parades and hear the music playing.
But deflation isn’t giving up and isn’t going away. Americans are deep in debt. And debts cause a man to pull back...to retrench...to downsize. We see that in the headlines too. Retail sales are going down. People are driving less. They’re trading in their SUVs for smaller, more economical cars. They’d like to trade in their big houses too – but they can’t find a buyer.
Downsizing means spending less money. And spending less money means fewer sales...and lower incomes...and fewer profits. It means an economic slump – and, typically, falling prices.
In today’s globalized world, that slump would have to reach worldwide proportions in order to have a major effect on key commodity prices, such as oil and grains. But that is probably coming.
The cure for high prices is high prices. You’ve probably heard that before. It describes the way markets work. Prices go up. The higher prices encourage consumers to use less...and encourage producers to produce more. It’s not long before the supply increases...and demand falls. Then, prices adjust downward.
Part of the reason that oil is so expensive is that many places subsidize it. Most governments in Asia and South America have held fuel prices down in order to placate consumers and stimulate growth. They’re now being forced to raise prices. Yesterday, for example, Malaysia announced a 40% increase in fuel prices – sure to dampen demand.
And so the world economy stumbles and lurches forward.
Ben Bernanke may make a feint in the direction of fighting inflation – maybe raising rates slightly. Oil will drop back below $100. Bonds will rise. But consumer price inflation may still not go down; it may actually continue to worsen in the United States, as the economy sinks further into a slump. Then, the next phase of the War Between Inflation and Deflation can begin.
