What is Deflation?

During wild price swings many recall, understand, and fear inflation as an insidious threat to our buying power as the paper dollars in our wallets buy less and less as prices go up. But what happens if prices go down?

Some economists fear that our economy, based heavily on debt, could implode much like it did during the Great Depression. During that period, not only did equities and businesses crash in value but real estate, commodities, and wages tumbled as well. During deflation, prices and income both fall so that purchasing power may stay the same, but debts don't disappear. Our recent housing crisis represented a period of deflation as home prices dropped but mortgage balances remained high, causing many to default on loans.

Recent price drops in commodities and stocks have some economists concerned again about deflation, especially in Europe and Japan, prompting calls issue fresh stimulus to deflation-threatened economies.

Gasoline Market Loses Steam

The sharp downward tumble in crude oil and its products, gasoline, diesel fuel, heating oil, and jet fuel is a major factor in all global economies and serves as a prominent example of the potential deflationary environment. Oversupply of petroleum and low demand for fuels due to slowing economies are both dragging on prices.

Of utmost interest to drivers, gasoline futures were trading as high as $3.15 in June, only to collapse to $2.23 by this week. Gasoline futures represent the wholesale value of the fuel, without taxes or other expenses like transportation costs.

Both retail consumers and those in agriculture & industrial production welcome the cheaper cost of fuel as it serves to boost profits and allows expenditures in other areas. Yet, extreme declines in any commodity can hurt those who produce it, forcing them out of the business, which ultimately limits future supplies.

Hogs Wallow

Agricultural commodities have been dropping precipitously as well, led lower by hogs.

Pork is getting cheaper after hog producers increased output over the last year in an effort to capture high prices. Meanwhile, more piglets are reaching adulthood as the PED virus that had been ravaging hog herds is subsiding. Finally, corn and soybean prices recently touched four-year lows, making it less expensive to feed the animals.

Since topping out near $1.33 in July, lean hog prices have collapsed to a mere 90 cents per pound on Friday.