Expert Commentary

Deflation Friday

Stack 'em high, sell 'em low.

"Black" days were originally used to describe calamitous declines in stock markets but the application has evolved over the years. Black Friday, in the shopping context, refers to the day after the Thanksgiving holiday in the United States of America and this year it falls on 29 November. There are a few derivations of the term Black Friday, the earliest being from 1951 where it was used to describe the practice of workers calling in sick the day after Thanksgiving to give themselves a 4-day weekend. The popular use of the term emanates from Philadelphia in the 1950s where the police described the huge crowds and traffic congestion on the busiest shopping day of the year as Black Friday. In the 1980s, retailers wanted to change the meaning to refer to the point in the year when they switched from operating at a loss to a profit. Future historians might look back at this era and link Black Friday with an age of suppressed prices.

There's no doubt about it. Black Friday and subsequent weeks are vitally important for retailers in the U.S. and elsewhere. Yet that very fact, where retailers' years are made or broken in a short time window, encourages price-deflationary behavior. Prices of goods are slashed as retailers concentrate on selling as much as possible. It's all about volume. This era of chronically low price inflation has been blamed on a number of factors such as globalization and the demise of collective bargaining entities such as Trade Unions. Another explanation could be the simple fact that a growing global economy actually encourages low prices. Think about it in simple terms. The more abundance of goods and services (greater supply) relative to demand, the harder it is for prices to rise quickly. Yet price deflation (falling prices) remains the bogeyman for central banks and governments around the world, mainly due to the inherent, if not explicitly stated, desire of governments to continually expand their reach. By making price deflation an enemy, they have an excuse to continually expand borrowing and counterfeit money. Frank Shostak recently published a salient piece on mises.org titled "Why Government Should Not Fight Deflation." He argues that low and falling prices benefit the consumer and concludes that, "...contrary to the popular view, a fall in the growth momentum of prices is always good news for the wealth generating process and hence for the economy."

We're not entirely convinced by that and think that the context is important. In the meantime, though, price inflation expectations have been falling around the globe this year. U.S. price inflation expectations, as measured by the 10-year bond breakeven rate, are now hovering just above the lows reached in 2016 and a break below would usher in much more attention on deflation. If that happens, expect increased attempts by government to reverse the process. The irony is, of course, that the same people who will be doing that will be the same people who will be more-than-happy to grab a "50% sale" reduction on their new gizmo from Amazon.

USA Inflation Expectations