Inflation versus deflation? Bull market versus bear market? The economy is confusing enough for the average person without all the jargon.
While most Americans just want to know how much a carton of eggs is going to cost, economists have a whole vocabulary for how to predict that statistic.
Wednesday, a new CPI (consumer price index) report will be released, giving economists a better idea of how much everyday life in the country is costing. The June report will cover everything from the price of housing to the cost of gas and give the Federal Reserve a roadmap for potential interest-rate increases.
After particularly stubborn inflation, some Americans may be wondering can prices actually fall? And would that be a good thing? Here’s a quick rundown on deflation:
What is deflation?
Deflation is the term economists use for a sustained period of dropping prices. Intuitively, it’s the opposite of inflation. Essentially, it’s a pattern of goods getting less expensive as consumer demand falls.
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Like inflation, deflation can be cyclical. If consumers see that prices are falling, they may be more likely to put off purchases to see if goods and services become even cheaper. Lower consumer spending pushes companies to cut prices further and the cycle continues.
Repaying debt on credit cards and mortgages also can become more of a challenge during a period of deflation as technically the money being paid back is now worth more than when they borrowed it.
Deflation vs. inflation:
Everything in moderation. Both economic states can be positive or negative depending on the extreme to which they reach.
Continuous inflation or deflation left unchecked can wound the economy. While deflation can drive down prices, which is good, profits and wages may also suffer and repaying debt becomes expensive. And if consumers put off purchases because prices are low, it can cause a vicious cycle that keeps the economy in a rut.
Inflation, on the other hand, can make the economy too hot: Wages grow but so do prices, leaving consumers facing sticker shock and eroding their purchasing power.
To measure deflation, economists most often set aside energy and food prices, which tend to be more volatile. The Fed instead uses a barometer known as the Core Personal Consumption Expenditures (PCE) price index.
The latest numbers for the PCE, which the Fed monitors closely, showed prices rose 0.1% from April to May, meaning inflation slowed. Household spending also rose at a more modest pace after surging in April. And if fewer dollars are chasing after purchases, that could remove more pressure on inflation.
No deflation is in sight just yet.
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