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Are We Heading Toward Deflation or Inflation?

Economy

Are We Heading Toward Deflation or Inflation?

by | Economy

Ben Constanty

CEO, Smartlink

Disrupting online payments with smart contracts.

Imagine you are the head of the Federal Reserve. You have had several years of lower than average inflation, then you are faced with a pandemic.

During the pandemic, people are wanting stimulus and financial aid, all while the intention was to slowly begin increasing inflation.

What do you do?

That is the current question trying to be answered by the Fed. Ideally, the Fed would like to have inflation right around 2%. Over the last few years, it has averaged under 2% (This is the official rate, the real rate is more around 8%).

The problem now is the pandemic and to operate around that.

🔎 Key takeaways

  • Stimulus money isn’t creating inflation as people stay home and tend to save money instead of spending
  • We are now going through a period of desinflation and deflation
  • We could see hyperinflation if inflation gets out of control after the pandemic

Deflation

Deflation

Right now, it can be argued we have been in a deflationary period. Prices have remained steady and the strength of the U.S. Dollar has been stable.

In March of 2020, when the Fed and company came to the rescue of a halted economy, rates were lowered, and stimulus was pumped into the economy.

In a normal world, more money into an economy means increased inflation.

However, people are saving and simply trying to survive. The extra money is being used for essentials, not discretionary spending.

This has not gone unnoticed and the Fed continues to state they want inflation to push past 2%.

The variable as you may have guessed is spending. Right now, the average consumer isn’t spending because of job uncertainty and the simple fact of there is nowhere to travel.

Until spending is increased, deflation could very well remain.

Inflation

Inflation

Now, on the other side of the coin we have inflation. Currently, with all the stimulus money being pumped into the economy, it is priming the markets for inflation.

For example, if the pandemic were to stop right now and people went back to normal with extra money, odds are it would be spent.

Couple that with the goals of the Fed and we would likely see inflation.

The main problem with chasing inflation right now is hyperinflation. An analogy would be a runaway train.

Inflation is being promoted but the goal is not to let inflation get out of hand, leading to hyperinflation. This is when a currency devalues exponentially.

Which are we heading towards?

Inflation or Deflation?

Currently, it is difficult to say. It feels as though we are teetering on the edge of either. There are certainly pros and cons to each.

From the consumer’s standpoint, which we will call the average person, inflation is not the desired outcome.

This leads to increased prices in nearly every aspect of life, food, gasoline, etc.

However, inflation is a natural occurrence as we progress into the future.

The simple costs of producing and manufacturing become higher, thus requiring more dollars, and the need for more dollars in the economy.

While it goes much deeper than that, it is a good high-level picture.

If the economy went back to normal right now, there is a strong possibility inflation would take hold.

However, the pandemic will continue to dampen those efforts. So for now, keep an eye on COVID and consumer spending.

Those two data points currently have a large impact on whether or not we experience continued deflation or a new era of inflation.

Ben Constanty

CEO, Smartlink

Disrupting online
payments with smart contracts.

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