Deflation and Recession

by JDH on August 6, 2022

Yup, I said it.  Deflation.  I know, all of the stories in the media are about inflation, but look at the evidence: commodity prices are down significantly from their peaks in February.  Consumer expectations are crashing.

Ask yourself this: are consumers more concerned about inflation, or about interest rates?

The answer, for anyone with variable rate debt, is interest rates.  With higher interest rates it’s more costly to buy a house, or a car, or service your existing debt.  Less buying is deflationary.  Simple as that.

But unemployment is low!

Yes, but unemployment is a lagging indicator.

It takes time to hire and train an employee, so employers are always playing “catch up.”  Employers don’t say “I think I will be busier in six months, so I’ll incur the expense of hiring and training employees now, because I may need them in the future.”  No, when you are busy you start hiring, and as you get less busy you are reluctant to incur the severance costs to reduce your workforce, so you hang on to your employees longer than needed.

That’s how it works.

So, stay tuned.

Higher interest rates are crashing the real estate market, and everything else, and that will lead to much lower inflation this winter.

That’s also not good for the stock market, so be forewarned.

Or not.  What do I know?

See you next week.