Friday, November 28, 2014

Economy: Deflation? What Deflation?

(Drivebycuriosity) - There is a lot talk about a coming deflation (bloomberg). Pessimists claim that low and shrinking inflation rates and falling prices for many goods will lead to a decrease in the general price level which would cause a new recession.

I disagree. I believe that the deflation fears are overblown and just part of the usual doom & gloom in the media. I bet that your dentist doesn`t get cheaper, neither your hairdresser -  and did you hear about falling restaurant prices recently? And prices for stocks, real estate, fashion and contemporary art are climbing swiftly (driveby).

"Stuff cheap, people expensive", says John Cochrane, who is an economist and Prof. at the University of Chicago (johnhcochrane). Here you can see a graph by the New York Times which shows a dichotomy: Services are getting more expensive and goods are getting cheaper ( I have no idea why in this graph television prices are falling more than 100%. This is a secret of the New York Times which is often at odds with economics and logic).

                                                  New Industrial Revolution

Prices for many industrial products have been falling for a long time thanks to the technological progress. Since the first industrial revolution in the late 18th century advances in manufacturing (automation) have been lifting efficiency of the producers which lead to shrinking costs. Today especially computers and other electronics cost just a fraction of what you had to pay some years ago.

I believe that we are experiencing a new technological revolution that is raising productivity  significantly (economy ). The advance of robotics, 3D-printing and other incarnations of automation  is reducing prices of manufactured goods considerably. The Internet, which gives access to a huge amount of data and reduces the costs of computing them, also lowers the cost of producing things. Thanks to reduced expenses for mass market goods consumers can spend more money for services, real estate, fashion, art and other expensive things.

The prices of many commodities are dropping too, which also is very positive. Since last June the price of oil collapsed almost 40% and some agriculture goods also got cheaper. This has nothing to do with deflation, a decrease of the general price level. Oil got cheaper because a bubble, that had been blown of in the recent years,  finally popped. I have been writing for years that oil is overpriced and that the bubble has to burst somedays (oil     mother-of-all-bubbles): High energy prices stimulated oil production (especially via fracking in USA) and suppressed demand (less driving, fuel efficient cars and other machines). But oil is still expensive. Oil - and gasoline at the pump -  cost still almost twice of what you had to pay before 2004 (econbrowser). I believe that the price of oil will be constrained in the coming years thanks to the technological progress which will encourage more oil exploration and will keep the energy demand at bay (climbing fuel efficiency).

Contrary to manufactured products most services are getting more expensive, at least those which are supplied by humans (services by machines like Internet search are already free). Prices for expensive watches, furniture, fashion, art and other handmade things also are climbing. Human skills are scarce and you have to pay more for the expertise of the doctors, designers, chefs and other produces of scarce products & services because the demand is growing thanks to rising incomes.

Low inflation rates - and falling prices for mass market goods - are good news because the money in your wallet is more worth.

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