Inflation vs Deflation what’s going on?

As the UK’s consumer price index fell to 4.2% this month due to price drops in games, toys and hobbies, as well as for clothing and footwear we seem to be observing an interesting economic environment. Whilst prices for food and energy are shooting up (necessities for sustaining life) The prices for non life sustaining items are dropping (games toys etc) . This is causing confusion when looking at inflation rates and is clouding the economic picture. It is quite natural for deflation in luxury consumer items during times of recession as business’ compete to lower their prices and attract customers, but the inflation in necessities at the same time brings us closer to a large misunderstanding in modern economics.

The majority of economists who are subscribing to the Keynsian economic method as developed by 20th century English economist John Maynard Keynes see inflation as simply an increase in prices and deflation as a decrease in prices, when in fact this is simply not true. The Austrain school of economics as developed by  Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Nobel laureate Friedrich Hayek in the late 19th and early 20th century has a much more interesting view on inflation. That being that Inflation is the increase in money supply and deflation the decrease in money supply. The rise and fall in prices that we see in day today life is simply the side effect of the increase or decrease in money supply available to society.

So if we were to follow this far more scientific approach to inflation and deflation how would our current situation fit in. Whilst huge amounts of money are being printed around the world and simply given to banks and now nations to stop them from defaulting we can see that clearly there is an increase in money supply. The interesting thing is  that this huge increase in money supply is being offset by the huge losses in available money as banks follow a several trillion dollar derivatives bubble down the plug hole. To make a simple example it is the equivalent of  filling up a bath whilst the plug is out. Any money that is pumped into these banks and nations is being immediately sucked up by the debts outstanding (plus interest of course)

The only way to keep the current system going is to literally keep printing money forever and give it to those nations and banks in need. This money is being borrowed by  central banks (IMF, federal reserve etc) with interest from the large private banking institutions. The Central banks are then loaning it to smaller banks and governments (with interest) who are then paying back the large banking institutions (with interest) the money that they have just been leant whilst also having to pay back the central banking loans as well (which came from the large banking institutions) . This is clearly almost a text book definition of insanity.

So whilst this is all going on in some imaginary mathematical battlefield what is actually happening in the real world ? As far as we can tell people have access to less money due to increasing food and energy bills, this is causing a decline in the purchasing power consumers have for leisure and luxury items and hence deflation in these items.

So what is causing the price increases in food and energy? In effect this is simply a supply and demand issue brought about by the two very things we talk about on this website. Those being climate change and peak oil. As the climate disturbs the agricultural industry and causes problems around the world there is a smaller supply of food available to an ever expanding population. More importantly though is that as oil and natural gas begin to rise in price (again a supply and demand issue) these price rises are passed on to every section of the agricultural industry (tractor makers, fertiliser makers, pesticide makers, transport, packing etc.) This is causing an exponential increase in the price of food (remember anything that rises with a % is rising exponentially). With regards to our energy increases this is again a supply and demand issue as more and more developed and developing nations bid for an exponentially decreasing pot of energy.

It sounds scary, and if we remain stuck thinking within our own man made box it certainly will be. Luckily the majority of these problems can be overcome using localisation and ingenuity, but only if we all choose to do so as communities.

“The thinking it took to get us into this mess is not the same thinking that is going to get us out of it.” – Albert Einstein

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