Deflation Versus Inflation [CHARTS]

Updated on

Deflation vs. Inflation by Shane Obata and Triggers, Tha Business

Some people are expecting deflation…

…Others are expecting inflation.

So who’s right?

Not Steve Liesman All of them.


Investopedia defines deflation as “a general decline in prices, often caused by a reduction in the supply of money or credit.”

While that’s not occurring everywhere, it is taking place in parts of the world.

Credit growth in Europe

The global economy is dependent on credit; if it doesn’t grow then neither will economic output.

Chart 1 shows that, in Europe, loans to private sector have been trending down since mid-late 2011 and are now negative.

Chart 1:

What this means is that exceptionally low interest rates are not having their intended effect – i.e. to increase lending.

Commodity prices

What’s more is that commodity prices are falling because global growth is decelerating.

Chart 2 displays that there’s a tight correlation between the emerging markets MSCI stock price index and the CRB raw industrials spot price index.

Chart 2:


If the US dollar continues to rally then commodity prices and the emerging markets will suffer.

China’s housing market

China’s property market was on fire from mid-late 2009 until recently.

Chart 3 indicates that the national average house price is starting to fall.

Chart 3:


If prices continue to decline then China’s economy could be in for a hard landing.

Global growth

World growth forecasts (lol) have been falling since Ben Bernanke first mentioned the taper.

Chart 4 demonstrates that developing EMEA and Latin America have seen the biggest negative revisions; presumably because they’re more vulnerable to a stronger US dollar.

Chart 4:


The preceding evidence proves that deflationary pressures are weighing on the world.

That said, inflation is also a concern.


Inflation is defined as “the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling”

Despite the media’s proclamations that “there’s no inflation”, it’s hard to deny that the average consumer is struggling. (h/t @rudyhavenstein)


Artificially low interest rates and central bank balance sheet expansion were supposed to lead to Zimbabwe 2.0 inflation.

According to the Consumer Price Index, whose growth has been mostly steady since 2010, that hasn’t transpired.

But is the CPI really a good measure of the cost of living?

(no, no it’s not.)

Purchasing power

Firstly, it’s important to note that inflation is cumulative.

Chart 5 reveals that, since Sep 1 ’84, the US dollar has lost ~55% of its purchasing power.

Chart 5:


The dollar isn’t holding its value and that’s not good for the US consumer.

The costs of living

Secondly, many costs are rising faster than the CPI is.

Chart 6 exhibits that, from Jan 1 ’94 to the present, the prices of Tuition, other school fees, and childcare, energy, medical care, and homes have grown considerably more than it has.

Chart 6:


Clearly, the consumer price index is not the best measure of the cost of living.

Asset prices

Thirdly, there’s been a lot of asset price inflation.

Chart 7 proves that, from Mar 9 ’09 to Oct 23 ’14, the S&P 500 and BOAML’s high yield index appreciated by 188.4% and 151.6%, respectively.

Chart 7:


Why is that a bad thing? Because not everyone owns financial assets.

That’s all folks!

In conclusion, the world is facing both deflationary and inflationary forces.

On one hand, global growth is slowing down.

And on the other, the cost of living is rising.

That’s a bad combination, but we’ll make it.

While you’re waiting for QE4 to see how it all goes down, remember to hold on to your assets…

…if you have any.   ;)


Leave a Comment

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!