Inflation or Deflation?

The news is full of economists concerned about either upcoming inflation or the current deflation. So which is right?

The inflationary argument is that the Fed is pumping money into the economy as fast as they can. The printing press always leads to high rates of inflation. The impact is being realized already in the increased price of commodities (like gold, oil, copper, etc.).

The deflationary argument is that prices are falling because consumers are spending less. This is because of both the trend to save more and the restricted credit markets. The evidence of deflation is seen in continuing declines in real estate prices and retail sales pricing.

Both arguments are logical and have supporting evidence. So are we experiencing inflation or deflation?

I believe that at this time, the answer is ‘yes.' Here is how I see it. We are seeing what I call ‘domestic deflation' and ‘international inflation.' The products that are priced domestically, like real estate and what we buy in the grocery and department stores, are experiencing deflation from a lack of demand and credit. The products that are priced in US dollars internationally are showing inflation because the money printing press is weakening the US dollar. For example, the price of a barrel of oil may stay the same if priced in Euros. But if the dollar is weakening against the euro, then the price of oil will increase in dollars even when it is unchanged as priced in euros. This is why we see local products falling in price and global products (like gas) increasing in price.

Eventually, the international inflation will more and more overwhelm the domestic products. This is because much of our retail products are made overseas. Thus, the weakness of the US dollar will eventually take its toll.

My prediction, for what it is worth, is that we will continue to see domestic deflation and international inflation for awhile and then inflation will rule. Time will tell.