As of late I have been addressing the issues we have with inflation quite frequently.  I thought it might be nice to discuss why a lack of inflation is truly a problem.

No one likes inflation!  I have never met a client that said, “A loaf a bread use to cost me $1.09 and now costs me $3.49; I am so excited to pay more for bread!”  Come on, we all want to get as much as we can for our money.  I am sure all of us have a preferred gas station because we know they are always a little cheaper than the rest (you know you just thought of the place, by the way, please share because I need a new one).  So on the surface, as a consumer, deflation does not necessarily seem like it would be a problem, so let’s explore where the problem lies.

If you could buy a 2014 car for $25,000 today and a year from now the price of a 2015 car (same make and model) was $23,750, would you be tempted to wait for prices to fall some more?  For those of you lying to yourself saying “no”, I ask another question; how many of you are waiting for rates to get back in the 3 percent range to refinance your home?

That’s what I thought…

So the problem that develops during a deflationary cycle is the consumer savings mob effect.  None of us spend any money waiting for the bottom of prices, this in turn causes Corporate America to:

–          Reduce prices to compete and gain buyers

–          reduce budgets due to heavy inventories and reduced profits

–          Not raise wages as cost of living reduces

–          Slash work forces, again to cut overhead

All of this puts less money into the consumer’s pocket, causing them to look for even better deals then before, because now they have less money.

That does not sound like a very easy cycle to break, does it?

In the US Inflation has remained subdued, but is still believed to pick up towards the end of the year.  So the deflation concern in the US has become more muted.

Japan is finally, after approximately 20 years of deflation experiencing mild inflation.

Europe is on a precipice at this point.  Economic activity and sentiment have improved dramatically over the last year, however inflation as a whole is under 1% and dropping.  They are at a point where something must be done to boost consumption and avoid slipping into a deflationary cycle.  As of late there have been indications of a stimulus package (to be seen) to boost consumption.

This week on the market

This week was marked by increased volatility, as we saw the markets shed a few percentage points in just a few days.  Much of this is attributed to Biotechnology stocks, which saw massive gains throughout 2013 and have been on a slide for several weeks now as profit pulling seems to have been replaced with concerns about lofty valuation.  This volatility may develop into a much needed correction on the broad markets, but with 2% movement it is still much too early to tell.

If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.

Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services.  Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.  Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.