Inflationary factors
- Often, wage pressures raise prices for good and services, filtering into the general economy (1960s)
- Sometimes, the combination of a weakening dollar and rising commodity prices send input costs higher, which kicks off an inflationary spiral (1970s)
- There are times when the cost of capital becomes so cheap it sends anything priced in dollars or debt off into an upwards spiral of (2000s)
Deflationary factors
- Technology, which creates massive economies of scale, especially in digital products (e.g., Software)
- Robotics/Automation, which efficiently create more physical goods at lower prices
- Globalization and Labor Arbitrage, which sends work to lower cost regions, making goods and services less expensive
Put into this context, Inflation is periodic, driven by specific events; Deflation is consistent, the background state of the modern economy. To fully understand this requires grasping how scarcity and abundance act as the drivers of the price of labor and goods. My suspicion is many economists who came of age during earlier eras of inflation fail to discern how the world has changed since.
Consider what this combination implies: the dominant modern world “flation” tends to be biased more towards falling than rising prices. We live in an era of Deflation, punctuated by occasional spasms of Inflation. This suggests that fears of inflation are likely to be more overstated, even with low monetary rates and high fiscal stimulus.