Many of us have felt the pain of inflation in our wallets as we go to the grocery store or pay for other consumer goods. Many of us feel it in our homes, as we pay for rising electric bills and increased rents. This has prompted many people to covet the “Pre-Covid days” and ask, “will prices ever get back to where they were pre-2020? Most people would laugh that question off and say, ‘yeah right! Prices never go down!’ Well, that’s not necessarily true. When prices go up, we call it inflation. But when prices go down, we call it ‘deflation.’ It has happened in the real world! While that sounds like something to be desired, we will quickly find out that there are dramatic consequences of deflation. So in today’s article, we answer a reader-submitted question:
Will the prices of goods ever get back to pre-2022 prices? Another way to ask this question is this: Inflation is bad. Is deflation better?
What is inflation?
Cost of goods and services increasing over time.
- Why are we experiencing Inflation now?
- COVID impact on supply chain and production cuts
- Government Monetary policy – Print money to keep crisis away
- Supply and demand – revenge spending
- What is the Fed trying to do to reduce inflation?
- Increase interest rates
- Tighten money supply (Quantitative Tightening).
- Will it work? We will see
- Will this help us get back to former pricing (2021 levels)?
See these episodes for more on inflation:
What is Deflation?
Deflation is when the prices of goods and services decrease across the entire economy, increasing the purchasing power of consumers. It is the opposite of inflation and can be considered bad for a nation as it can signal a downturn in an economy, leading to a recession or depression. Deflation can also be brought about by positive factors, such as improvements in technology. (Investopedia)
What would cause deflation? Drop in wages, drop in prices, drop in home values, lower consumer demand/confidence.
Is Deflation Worse Than Inflation?
It depends. Deflation can be worse than inflation if it is brought about through negative factors, such as a lack of demand or a decrease in efficiency throughout the markets. Deflation can be better than inflation if it is brought about by positive factors, such as improvements in technology that make the costs of goods and services cheaper. (Investopedia)
However, there is danger of a downward spiral.
Is deflation something to be desired?
Prices going down is a great thing (sometimes). However, across the board, not so much! There is too much of a risk of deflation having an overall negative impact across the entire economy.
Examples of Deflation
JAPAN (1991-2001) – Known as the “Lost Decade,” from 1991 to 2001, the Japanese economy experienced a prolonged period of deflation. But before the 1990s, Japan’s economy was one of the most productive, growing more than four percent each year.
The primary causes of this downturn were skyrocketing interest rates and falling equity rates. As a result, a “liquidity trap” occurred. This is when investors sit on their cash because they will earn better returns instead of investing or spending it. Typically, they do this because deflation is just around the corner. As a nation, Japan managed to recover but did so slowly. (Point Editorial)
THE GREAT DEPRESSION (1929-1938) – Starting in 1929 and continuing into the 1930s, is arguably the best-known example of real-world deflation. A significant drop in demand, supply, and prices led to the collapse of companies across the country, and even the collapse of banks themselves. The events of the Great Depression echoed across the globe and took a toll on the markets in other countries as well. It took until 1942 for the country to recover. (Point Editorial)
Will we ever get back to pre-2022 prices?
Nope, we hope not! If this happened, we would run the risk of bringing about a downward spiral, which would not be good for anyone!
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