Are We Seeing Deflation?

For the past couple of years, the average American has been worried about the financial future. Financial experts are having trouble telling whether we are headed for inflation or deflation. As fewer people are working and many more have had their hours cut back, some stores have reduced prices as an incentive to get people to buy. One plausible theory is that we will first see deflation, and will see inflation later on; Adam Posen, who belongs to the Bank of England Monetary Policy Committee, believes in this theory; I think that it is quite plausible. We have already seen the signs of deflation in a few key areas.

Housing Deflation

Probably the most obvious area where deflation has struck is in the housing industry. Low interest rates and easy loan terms made it simple for many people to get mortgages, whether it was a good idea for them to buy a home at the time or not. This drove up the price of housing, until it was nearly unaffordable in some areas. More people were taking out interest-only and 50-year mortgages as a way to afford these skyrocketing home prices. The prices of homes started to fall around 2008. Since then, the rate of foreclosures has gone up, and the price of housing has gone down. More people than ever are underwater in their mortgages. In some cases, the only way to sell a home is to put it up for short sale.

Food Prices

As someone who does most of the grocery shopping for my family, I have noticed a recent decrease in the price of food, at least in the Phoenix area, where I do most of my shopping. Food prices spiked from around 2005 to 2008. In 2005, I was able to feed a family of three, including toiletries, on $40 a week if I took advantage of sales and use coupons. Between 2005 and 2008, the average amount that I spent on groceries rose to $70 or $80 a week, although I had to buy for one more person. Recently, the prices of some items that I shop for has gone down. Prices for two-liter bottles of (name brand) soda were around $.88 in 2005, and rose to nearly $1.50 about a year ago. It is now common to see soda on sale for $1. Milk prices rose from about $1.50 a gallon in 2005, to $3 per gallon several years ago; milk can commonly be found for $2 or less a gallon now, if you buy the store brand. Prices obviously fluctuate in different parts of the country, but this is what I have noticed from shopping trips in my area.

What's Next

Deflation can be a troublesome problem for people who are in debt and are earning less money. Prices are not likely to deflate forever. The United States government has been printing a lot of money in the last year or so, and this increase in the money supply is likely to catch up eventually. That is why many people think that inflation is coming, and can be one of the reasons why the price of gold has gone up. Whatever the money supply does, we will probably be in for a bumpy ride in the near future.