If we’re unlucky, one of the “words of 2015” is going to be deflationby Andy Davis / February 19, 2015 / Leave a comment
Published in March 2015 issue of Prospect Magazine
Well known investors usually say they ignore the macroeconomic backdrop because good companies can prosper whatever the conditions. I tend to agree: the link between the economy’s performance and stock markets is tenuous. However, I’ve found it harder than usual to ignore economic commentators recently—because I find their explanations of what’s been happening in big parts of the world economy so profoundly unhelpful, not to say misleading.
If we’re unlucky, one of the “words of 2015” is going to be deflation. The appearance of mild price declines in the eurozone has prompted commentators to trot out the stock explanation of how deflation works, namely that it induces people to postpone purchases in the expectation that prices will fall. To my mind this formulation is glib but it seems to be repeated ad nauseam by clever people running on autopilot.
How can it be true in practice? The idea that I would put off buying food because it will be cheaper next week is absurd. If prices were falling by huge amounts per day, I might postpone my morning shop until the afternoon but we are thankfully a million miles from that situation, which in any case could not persist for long. Equally, although I’m used to the idea that the prices of technologies such as smartphones tend to fall, it has never yet induced me to put off buying.
If you’re a professional economist, you’re probably pretty well off. You have the means to make lots of discretionary purchases, so maybe you do indeed put off replacing your second car in the expectation of a better deal later on. But most of us just shop around more energetically, use the internet to compare prices, buy second-hand instead of new, search for voucher codes online, trade down to budget brands or simply decide that we can do without whatever it is, or that our credit card can’t stand the strain and the purchase will have to wait. If you put off buying, is that really because you’re an empowered consumer cannily playing a falling market? No, it’s because you’re feeling stretched.