By Samuel Taube
Transcript:
Samuel Taube: Joining us today again is Ryan Fitzwater, the Director of Research for The Oxford Club, and today we’re talking about inflation and deflation. Ryan, thanks for joining us.
Ryan Fitzwater: It’s great to be here again, Sam.
ST: So… what is inflation, and what is deflation? And also, what causes both of those phenomena?
RF: Inflation is simply when prices are rising, and deflation is when prices are falling. You can have both of these at the same time going on in various asset classes.
And when they go to their extremes, they’re bad for the economy in many ways.
So first let’s start with inflation. When it gets out of control, when it gets crazy, it’s called hyperinflation.
ST: Right.
RF: And that’s when prices rise, like, 50% in a month. That’s rare, but there have been cases of that in the past.
On the other end of the scale is asset inflation. This is happening all the time. For example, oil and gas prices spike every year in the spring. And that’s normally because commodity traders are bidding up oil prices because people are going to drive more in the summer…
ST: Right, and the refineries have seasonal trends of their own as well.
RF: Exactly. So that’s asset inflation right there. That’s rising prices. So you can understand inflation; you’ve seen it before. You’ve seen it at the supermarket. If there’s a shortage of oranges, your orange juice might cost more. That’s asset inflation.
On the other side, there’s deflation. Deflation is when prices are falling. It can be hard to spot, because they don’t always fall uniformly. With deflation, you can have inflation in other parts of the economy.
Let’s take oil and gas again – there’s deflationary pressures there. When all this oil and gas came online due to the shale revolution, that was deflationary pressure on prices because there was more supply and the same amount of demand.
ST: Right.
RF: So that is a deflationary pressure right there. And that’s kind of like the basic explanation of those two.
ST: I see. And it strikes me that oil and gas are good examples of how deflation can have negative consequences. At a surface level, it might seem like lower prices are a good thing. But obviously we’ve seen a lot of energy companies really get hurt by this.
RF: Right. It’s good for one person; it’s bad for another. If you’re an airliner, you want to see oil prices go down. It’s going to help your bottom line.
Versus the oil company, you’re selling oil at $100, and now suddenly you have to sell it at $40. It’s going to change your revenue stream; it’s going to change your bottom line and your profit margins.
ST: I see. I think most people are familiar with some examples of hyperinflation – you’ve got Zimbabwe in the last couple decades, Venezuela right now, Germany after World War I – but what’s an example of a country that has suffered (or is suffering) from deflation?
RF: So hyperinflation is really bad… but …read more
Source:: Investment You
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