5 ms·

If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases

by runako 4y ago

If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future). When everyone slows spending at once, it can lead to severe a recession or depression.

krsrhe 4y ago
geye1234 4y ago
Perhaps for businesses this may be true. It's hard to imagine for a consumer. I'm not going to delay the purchase of groceries, a fridge, a new roof or (if I'm feeling rich) a new car just because they may be 3% cheaper next year. I'm not saying this conventional wisdom is wrong, but it's not obviously right.
- nativespecies 4y ago
  I wouldn't underestimate peoples' want (or need) to save extra money right now. Most working people will do anything they can to save in this economy.
- TremendousJudge 4y ago
  Yes, that's exactly why deflation is bad for the average person. You can't afford to save your money (which is increasing in value just sitting there) because you HAVE to spend it on food, rent, etc. People who can afford to, don't spend their money and they get nominally richer. Anything you buy will decrease in value, so people tend to avoid it. This isn't hypothetical, it has happened every time there's deflation in an economy. It widens the gap between the rich and poor.
- christophilus 4y ago
  Generally speaking, periods of deflation are a symptom of an existing economic malaise. Prices might drop because of solid gains in efficiency, but they generally drop because of a loss of demand. That loss of demand is generally caused by economic hardship. Therefore, deflation is correlated with economic hardship, but I think it's a correlation, not a causation. So, I'm with you. I've had it explained to me many times, and it still doesn't make much sense to me. I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices (well, except for investments, if I have some magic insight). From a business perspective, I've been involved in many purchasing decisions and never once was "it might be cheaper or more expensive in the future" a part of the decision making process. It really feels like "deflation is bad" is an economic theory that should be tested. Yes. We've had deflationary shocks, and those were bad, but that was because a) it was a shock rather than a gradual slope and b) it usually followed a period of marked excess. I'm not convinced that deflation itself was the enemy as much as the other ancillary issues. It's hard to disentangle that, though.
  - runako 4y ago
    > I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices. Think about the prevalence of sales, and their impact on moving goods. If you need a TV, but the need is not urgent, you (okay, not you, but most people) might wait for the New Year's sales in a couple of weeks to save a few bucks. Same with cars and other appliances. Or people look for a coupon code to save some money. If sales and coupons make sense, consumer decision making in deflationary environments should also make sense. If you don't understand why people wait for sales to purchase things, you may want to talk to some working-class people to understand what it is like to not have enough money to buy everything you need immediately when you need it. > it was a shock Japan has been in a gradually deflating environment for decades.
- runako 4y ago
  > delay the purchase of groceries This will obviously not mean skipping eating, but will manifest more as fewer "special" meals like steak or lobster or whatever. > a fridge, a new roof If you are a homeowner, you know that most equipment failures are a decision to either repair or replace. In a deflationary environment, owners will bias toward patching things as long as they can. (The opposite is true in an inflationary environment.) > a new car You may be extremely fortunate. Most people would try to make it through (say) a year of public transit/rideshare/etc. if they could save (say) 8% on a car. Average price of a new car in 2022 is ~$48k; saving 8% on that is something like half a month's pay at the average American salary, which is larger than the annual raises most people get at even good jobs, even in good times. Don't underestimate the sacrifice people will make to earn another few hundred $/mo.
  - wewtyflakes 4y ago
    All of those things seem okay, or even good.
    - runako 4y ago
      Health and other benefits aside, they are "bad" in the context of people don't like having those decisions forced on them.
    - notahacker 4y ago
      Until your employer informs you that due to reduced sales, your salary will be falling even faster than prices...
  - ClumsyPilot 4y ago
    > owners will bias toward patching things as long as they can So if we live more sustainably, the economic system colapses? Is that a bug or a feature? I just had my landlord throw away the dishwasher because replacing the tiny pump was not worth the effort. Myfriend threw away a fridge because replacing a single part, the compressor, was not worth the trouble.
    - 4y ago
- gumby 4y ago
  Actually, consumers very much do delay purchases, especially of big ticket items like white goods, cars, and houses in deflationary regimes, just as in periods of hyperinflation they do the opposite. This is easy to look up as there are many examples through history (especially of the latter — Brazil is an excellent and frightening example). Groceries, sure, but then as a consumer you are still impacted because suppliers are less likely to provide the goods you want. Deflation is really bad. One of the consequences of the gold standard was the big swings (inflationary after a big gold strike, like California' Yukon, or Victoria; deflationary when the gold supply could not keep up with economic activity) that you can easily see in the second half of the 19th century.
  - notahacker 4y ago
    And indeed if consumers didn't delay purchases, we wouldn't see deflation. Businesses don't collectively decide to reduce prices month after month out of generosity. They do it because the economy is in a position where none of them are selling enough at the current price. If everyone is selling less stuff at lower prices, then sooner or later the problem becomes the employees'...
    - gumby 4y ago
      Very good and strangely non-obvious point.
  - tnel77 4y ago
    It’s not the same situation, but most video games I will wait a year or two to purchase. $70 day one, or $20 on Black Friday a year from now with all the DLC included?
    - listenallyall 4y ago
      It's extremely rare for inflation/deflation to reach double-digits. Would you actually wait if the price a year from now was $67 (and no extra content)?
zppln 4y ago
I'm not sure I buy (heh) into this. I usually buy things because I need them, or want them in the moment. I'm not gonna postpone buying a washing machine because it might be cheaper next month. I'm not gonna pass on getting wasted because drinks are cheaper next month. I'm not gonna starve myself because food might be cheaper next week.
- runako 4y ago
  > I usually buy things because I need them, or want them in the moment. Consider yourself extremely fortunate to be able to manage your purchases this way, but also consider that this is not the norm.
- woodruffw 4y ago
  These are market trends, not individual behavioral trends. We know that people do spend money during periods of inflation, because they understand that the relative purchasing power of their money is decreasing. The contrapositive of that is that they don't spend as much during periods of deflation, because their relative purchasing power is going up. (There's also an error in assigning unit purchases like washing machines as a proxy for consumer behavior: consumers select within a purchasing category more frequently that then opt out of categories. In other words: deflation and inflation can determine how much you're willing to spend on a washing machine, rather than breaking your commitment to already purchase one.)
- dragonwriter 4y ago
  > I'm not sure I buy (heh) into this. I usually buy things because I need them, or want them in the moment. I'm not gonna postpone buying a washing machine because it might be cheaper next month. There’s a reason n=1 samples aren't usually the basis for general descriptions of behavioral trends.
  - temp2022acc 4y ago
    N=2 with me but yeah I can understand. Obviously that's why economic niches still exist and broad models only explain broad trends.
bnralt 4y ago
If anyone's interested, Japan is seen as a cautionary tale for the bad things that low inflation/deflation can bring. They've been fighting it for years[1]. [1] https://foreignpolicy.com/2022/04/25/inflation-japan-deflation-economy/ https://foreignpolicy.com/2022/04/25/inflation-japan-deflati...
listenallyall 4y ago
I think you have to put every scenario in context with what came before. Yes, traditionally, widespread deflation can sometimes lead to recession. But when the economy has been running overheated for years, it's more of a correction to cool things off. If you're driving at 120 mph and tap the brakes, that's different than driving the speed limit and braking, the latter is much more likely to cause a traffic jam.
- thinkharderdev 4y ago
  We've been below the target inflation rate for 15 years. We haven't had CPI consistently above 2% in the US since the 1980s. I don't see how this can be a "correction"
  - listenallyall 4y ago
    The 15-year average temperature of a building could easily be within a normal, safe range, but if it is currently on fire, the past 15 years don't really matter, do they?
    - thinkharderdev 4y ago
      1. The inflation situation is not "on fire." It's bad for sure but let's not catastrophize here. 2. If a building is on fire, the goal is not to make the building a meat locker for a few months/years to "compensate" for the fire. The goal is to put the fire out and return to a normal temperature.
      - listenallyall 4y ago
        > the goal is not to make the building a meat locker Well, you do put out fires with a CO2 file extinguisher blasting at 50 or 60 below zero. > let's not catastrophize here. Minus 2 percent inflation would be closer to the "Fed target" than the recent 7-8% we have been experiencing. The idea that many of you are trying to push, that deflation of any kind is a guaranteed financial disaster, that's the hyperbole that ought to be suppressed.
A4ET8a8uTh0 4y ago
<<If the expectation is that everything will be cheaper next month than this month This may be the misconception that is driving this. Nothing will be cheaper ( decrease in price ). It will simply not appreciate in price as much ( price will increase less ). << When everyone slows spending at once, it can lead to severe a recession or depression. Agreed, especially in US where consumer spending drives the economy. Still, in US, for better or worse, a lot of personal wealth is stored in real estate ( which also manages to explain some US idiosyncrasies ). Deflation would 'destroy' equity for owners of that real estate so a lot is regularly being done to keep the housing prices high and even more to keep them from going lower. It is not bad in itself. Frankly, I personally see deflation as a way of economy correction, but that is one person that has limited exposure to some of those pressures. But deflation is not what is happening here. Deflation would be a negative inflation rate ( and that is not the case ). Now..there are few other angles to consider. Higher inflation means our debt is 'worth' less; deflation means it is worth 'more'. If you owe a million dollars in an environment, where an average house costs a million dollars, it is likely that it becomes the norm ( and it is technically good for the borrower ). Interestingly, some would argue US was actually trying to inflate their way out of its staggering debt. There are also import/export considerations for companies that operate in that space ( as you also noted ), but I am hardly an expert ( or even that interested in that subject ).
- runako 4y ago
  > Nothing will be cheaper ( decrease in price ) I strongly recommend you review the definition of deflation. > Higher inflation means our debt is 'worth' less Inflation is a huge benefit to the debtor class, which includes most homeowners. The rhetorical tactic of focusing on high gas prices brilliantly misdirects people from asking the relevant question of why their wages aren't increasing at the same rate as inflation. Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened.
  - A4ET8a8uTh0 4y ago
    <<I strongly recommend you review the definition of deflation. It is possible I am working with old mental models, but first search result defines it as: "Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency. It can be driven by an increase in productivity and the abundance of goods and services, by a decrease in total or aggregate demand, or by a decrease in the supply of money and credit." If prices increase ( albeit at a lower rate ), it is still inflation ( especially if purchasing power stays where it is, which it typically would ). Can you elaborate on your thought process? It is possible I am misreading something. << Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened. Um.. I think I have to categorize that statement as wishful thinking. Federal minimum wage remains very low and even recent attempts to update it were shot down. I think 'eventually' is doing a lot of heavy lifting here ( it likely is true, but the time horizon on that statement is fairly long ). I am open to discussion, but I am not convinced at this time. [1]https://www.investopedia.com/articles/personal-finance/030915/why-deflation-bad-economy.asp https://www.investopedia.com/articles/personal-finance/03091...
bko 4y ago
Why do people stand on line to buy the new iPhone every year when they know the price will drop significantly for that model in the next year? In fact all technology has steep depreciation (last year's TV model is significantly cheaper than when it first came out, even in absolute terms). But for some reason these are the hottest selling products
djg321 4y ago
Interestingly enough, prices don't even need to become cheaper month to month for there to be an incentive to delay spending. Having access to a positive (real) interest bearing account does the same thing: why spend $1000 today when you can spend $1000 a year from now and keep the $30 in interest (assuming a 3% real interest rate).

by runako 4y ago

krsrhe 4y ago

geye1234 4y ago

Perhaps for businesses this may be true. It's hard to imagine for a consumer. I'm not going to delay the purchase of groceries, a fridge, a new roof or (if I'm feeling rich) a new car just because they may be 3% cheaper next year. I'm not saying this conventional wisdom is wrong, but it's not obviously right.

nativespecies 4y ago
I wouldn't underestimate peoples' want (or need) to save extra money right now. Most working people will do anything they can to save in this economy.
TremendousJudge 4y ago
Yes, that's exactly why deflation is bad for the average person. You can't afford to save your money (which is increasing in value just sitting there) because you HAVE to spend it on food, rent, etc. People who can afford to, don't spend their money and they get nominally richer. Anything you buy will decrease in value, so people tend to avoid it. This isn't hypothetical, it has happened every time there's deflation in an economy. It widens the gap between the rich and poor.
christophilus 4y ago
Generally speaking, periods of deflation are a symptom of an existing economic malaise. Prices might drop because of solid gains in efficiency, but they generally drop because of a loss of demand. That loss of demand is generally caused by economic hardship. Therefore, deflation is correlated with economic hardship, but I think it's a correlation, not a causation. So, I'm with you. I've had it explained to me many times, and it still doesn't make much sense to me. I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices (well, except for investments, if I have some magic insight). From a business perspective, I've been involved in many purchasing decisions and never once was "it might be cheaper or more expensive in the future" a part of the decision making process. It really feels like "deflation is bad" is an economic theory that should be tested. Yes. We've had deflationary shocks, and those were bad, but that was because a) it was a shock rather than a gradual slope and b) it usually followed a period of marked excess. I'm not convinced that deflation itself was the enemy as much as the other ancillary issues. It's hard to disentangle that, though.
- runako 4y ago
  > I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices. Think about the prevalence of sales, and their impact on moving goods. If you need a TV, but the need is not urgent, you (okay, not you, but most people) might wait for the New Year's sales in a couple of weeks to save a few bucks. Same with cars and other appliances. Or people look for a coupon code to save some money. If sales and coupons make sense, consumer decision making in deflationary environments should also make sense. If you don't understand why people wait for sales to purchase things, you may want to talk to some working-class people to understand what it is like to not have enough money to buy everything you need immediately when you need it. > it was a shock Japan has been in a gradually deflating environment for decades.
runako 4y ago
> delay the purchase of groceries This will obviously not mean skipping eating, but will manifest more as fewer "special" meals like steak or lobster or whatever. > a fridge, a new roof If you are a homeowner, you know that most equipment failures are a decision to either repair or replace. In a deflationary environment, owners will bias toward patching things as long as they can. (The opposite is true in an inflationary environment.) > a new car You may be extremely fortunate. Most people would try to make it through (say) a year of public transit/rideshare/etc. if they could save (say) 8% on a car. Average price of a new car in 2022 is ~$48k; saving 8% on that is something like half a month's pay at the average American salary, which is larger than the annual raises most people get at even good jobs, even in good times. Don't underestimate the sacrifice people will make to earn another few hundred $/mo.
- wewtyflakes 4y ago
  All of those things seem okay, or even good.
  - runako 4y ago
    Health and other benefits aside, they are "bad" in the context of people don't like having those decisions forced on them.
  - notahacker 4y ago
    Until your employer informs you that due to reduced sales, your salary will be falling even faster than prices...
- ClumsyPilot 4y ago
  > owners will bias toward patching things as long as they can So if we live more sustainably, the economic system colapses? Is that a bug or a feature? I just had my landlord throw away the dishwasher because replacing the tiny pump was not worth the effort. Myfriend threw away a fridge because replacing a single part, the compressor, was not worth the trouble.
  - 4y ago
gumby 4y ago
Actually, consumers very much do delay purchases, especially of big ticket items like white goods, cars, and houses in deflationary regimes, just as in periods of hyperinflation they do the opposite. This is easy to look up as there are many examples through history (especially of the latter — Brazil is an excellent and frightening example). Groceries, sure, but then as a consumer you are still impacted because suppliers are less likely to provide the goods you want. Deflation is really bad. One of the consequences of the gold standard was the big swings (inflationary after a big gold strike, like California' Yukon, or Victoria; deflationary when the gold supply could not keep up with economic activity) that you can easily see in the second half of the 19th century.
- notahacker 4y ago
  And indeed if consumers didn't delay purchases, we wouldn't see deflation. Businesses don't collectively decide to reduce prices month after month out of generosity. They do it because the economy is in a position where none of them are selling enough at the current price. If everyone is selling less stuff at lower prices, then sooner or later the problem becomes the employees'...
  - gumby 4y ago
    Very good and strangely non-obvious point.
- tnel77 4y ago
  It’s not the same situation, but most video games I will wait a year or two to purchase. $70 day one, or $20 on Black Friday a year from now with all the DLC included?
  - listenallyall 4y ago
    It's extremely rare for inflation/deflation to reach double-digits. Would you actually wait if the price a year from now was $67 (and no extra content)?

zppln 4y ago

I'm not sure I buy (heh) into this. I usually buy things because I need them, or want them in the moment. I'm not gonna postpone buying a washing machine because it might be cheaper next month. I'm not gonna pass on getting wasted because drinks are cheaper next month. I'm not gonna starve myself because food might be cheaper next week.

runako 4y ago
> I usually buy things because I need them, or want them in the moment. Consider yourself extremely fortunate to be able to manage your purchases this way, but also consider that this is not the norm.
woodruffw 4y ago
These are market trends, not individual behavioral trends. We know that people do spend money during periods of inflation, because they understand that the relative purchasing power of their money is decreasing. The contrapositive of that is that they don't spend as much during periods of deflation, because their relative purchasing power is going up. (There's also an error in assigning unit purchases like washing machines as a proxy for consumer behavior: consumers select within a purchasing category more frequently that then opt out of categories. In other words: deflation and inflation can determine how much you're willing to spend on a washing machine, rather than breaking your commitment to already purchase one.)
dragonwriter 4y ago
> I'm not sure I buy (heh) into this. I usually buy things because I need them, or want them in the moment. I'm not gonna postpone buying a washing machine because it might be cheaper next month. There’s a reason n=1 samples aren't usually the basis for general descriptions of behavioral trends.
- temp2022acc 4y ago
  N=2 with me but yeah I can understand. Obviously that's why economic niches still exist and broad models only explain broad trends.

bnralt 4y ago

If anyone's interested, Japan is seen as a cautionary tale for the bad things that low inflation/deflation can bring. They've been fighting it for years[1]. [1] https://foreignpolicy.com/2022/04/25/inflation-japan-deflation-economy/ https://foreignpolicy.com/2022/04/25/inflation-japan-deflati...

listenallyall 4y ago

I think you have to put every scenario in context with what came before. Yes, traditionally, widespread deflation can sometimes lead to recession. But when the economy has been running overheated for years, it's more of a correction to cool things off. If you're driving at 120 mph and tap the brakes, that's different than driving the speed limit and braking, the latter is much more likely to cause a traffic jam.

thinkharderdev 4y ago
We've been below the target inflation rate for 15 years. We haven't had CPI consistently above 2% in the US since the 1980s. I don't see how this can be a "correction"
- listenallyall 4y ago
  The 15-year average temperature of a building could easily be within a normal, safe range, but if it is currently on fire, the past 15 years don't really matter, do they?
  - thinkharderdev 4y ago
    1. The inflation situation is not "on fire." It's bad for sure but let's not catastrophize here. 2. If a building is on fire, the goal is not to make the building a meat locker for a few months/years to "compensate" for the fire. The goal is to put the fire out and return to a normal temperature.
    - listenallyall 4y ago
      > the goal is not to make the building a meat locker Well, you do put out fires with a CO2 file extinguisher blasting at 50 or 60 below zero. > let's not catastrophize here. Minus 2 percent inflation would be closer to the "Fed target" than the recent 7-8% we have been experiencing. The idea that many of you are trying to push, that deflation of any kind is a guaranteed financial disaster, that's the hyperbole that ought to be suppressed.

A4ET8a8uTh0 4y ago

<<If the expectation is that everything will be cheaper next month than this month This may be the misconception that is driving this. Nothing will be cheaper ( decrease in price ). It will simply not appreciate in price as much ( price will increase less ). << When everyone slows spending at once, it can lead to severe a recession or depression. Agreed, especially in US where consumer spending drives the economy. Still, in US, for better or worse, a lot of personal wealth is stored in real estate ( which also manages to explain some US idiosyncrasies ). Deflation would 'destroy' equity for owners of that real estate so a lot is regularly being done to keep the housing prices high and even more to keep them from going lower. It is not bad in itself. Frankly, I personally see deflation as a way of economy correction, but that is one person that has limited exposure to some of those pressures. But deflation is not what is happening here. Deflation would be a negative inflation rate ( and that is not the case ). Now..there are few other angles to consider. Higher inflation means our debt is 'worth' less; deflation means it is worth 'more'. If you owe a million dollars in an environment, where an average house costs a million dollars, it is likely that it becomes the norm ( and it is technically good for the borrower ). Interestingly, some would argue US was actually trying to inflate their way out of its staggering debt. There are also import/export considerations for companies that operate in that space ( as you also noted ), but I am hardly an expert ( or even that interested in that subject ).

runako 4y ago
> Nothing will be cheaper ( decrease in price ) I strongly recommend you review the definition of deflation. > Higher inflation means our debt is 'worth' less Inflation is a huge benefit to the debtor class, which includes most homeowners. The rhetorical tactic of focusing on high gas prices brilliantly misdirects people from asking the relevant question of why their wages aren't increasing at the same rate as inflation. Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened.
- A4ET8a8uTh0 4y ago
  <<I strongly recommend you review the definition of deflation. It is possible I am working with old mental models, but first search result defines it as: "Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency. It can be driven by an increase in productivity and the abundance of goods and services, by a decrease in total or aggregate demand, or by a decrease in the supply of money and credit." If prices increase ( albeit at a lower rate ), it is still inflation ( especially if purchasing power stays where it is, which it typically would ). Can you elaborate on your thought process? It is possible I am misreading something. << Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened. Um.. I think I have to categorize that statement as wishful thinking. Federal minimum wage remains very low and even recent attempts to update it were shot down. I think 'eventually' is doing a lot of heavy lifting here ( it likely is true, but the time horizon on that statement is fairly long ). I am open to discussion, but I am not convinced at this time. [1]https://www.investopedia.com/articles/personal-finance/030915/why-deflation-bad-economy.asp https://www.investopedia.com/articles/personal-finance/03091...

bko 4y ago

Why do people stand on line to buy the new iPhone every year when they know the price will drop significantly for that model in the next year? In fact all technology has steep depreciation (last year's TV model is significantly cheaper than when it first came out, even in absolute terms). But for some reason these are the hottest selling products

djg321 4y ago

Interestingly enough, prices don't even need to become cheaper month to month for there to be an incentive to delay spending. Having access to a positive (real) interest bearing account does the same thing: why spend $1000 today when you can spend $1000 a year from now and keep the $30 in interest (assuming a 3% real interest rate).