Is there a long-run deflationary trend right now?

by on November 6, 2010 at 3:54 pm in Economics | Permalink

Although the cited source says as much, please don't take these remarks as my dismissal of the relevance of AD cyclical macro.  Still, I find this idea intriguing:

Anyone who still thinks falling prices are a cyclical phenomenon isn’t looking closely. It’s secular, and the sudden ubiquity of discount outfits shows how Japanese consumption has become a race to the bottom of the pricing spectrum.

There is more detail here and note the trend is occurring even though Japan does not have declining real per capita income. 

In a wide variety of areas, ranging from ethnic food vs. fine dining to blogs vs. books to the art world (Outsider Art is often more visceral and enduring) to clothing, there is a common realization going on: cheap stuff is often better than the more expensive stuff.  Furthermore, information technology allows you to reframe your consumption, countersignal your personal image, and reaffiliate with others, and their social movements, in ways which increase the status value of the lower priced goods.  It is now quite easy to find the (possibly) small pool of people who will respect you for your cheap hobby or obsession.  You can buy obscure items and even your uninformed friends can Google to find out what they are and why some people think they have value.  In relative terms, a famous, mainstream, and somewhat upper-class "Nordstrom" label is worth less than before.

These developments remove or at least limit the status-based reasons for buying the higher-priced goods.

Mike Munger took us all for pupusas and we loved it; no one was bitching about the absence of seared tuna.

babar November 6, 2010 at 12:21 pm

then we should expect that producers can demand price increases for higher quality pupusas? that would indeed be nice. i'd like to see some evidence of it though.

Swedo November 6, 2010 at 12:45 pm

This posting is next to
http://peterschiffblog.blogspot.com/2010/11/commo

in my RSS Reader. Irony.

BPO November 6, 2010 at 12:54 pm

Assuming people are paying for those upper class labels based on quality, sure. That's often not the case.

Bill Stepp November 6, 2010 at 1:18 pm

Talking about not paying attention–this would include people who discuss Japan without mentioning its heavy regulatory burden and high corporate taxes. Krugman is Exhibit A.

Deflation is also not to be feared to the extent it's caused by productivity gains (good deflation).

Bad deflation is caused by the State entity.

john personna November 6, 2010 at 1:38 pm

I'm one of those trying out a safety razor. It isn't as easy as a multi-blade, but I'm kind of tired of the cartridge lock-in.

Norman Pfyster November 6, 2010 at 2:41 pm

"It is now quite easy to find the (possibly) small pool of people who will respect you for your cheap hobby or obsession."

I had to laugh at that, having spent almost my entire life around surrounded by people who were either indifferent, or actively hostile, to status goods. I'd say this was a midwestern and southern phenomenon, except I generally found the same thing in New York, too.

Craig November 6, 2010 at 3:57 pm

Absent the Fed's never-ending quest to inflate the currency, we'd have seen a century of deflation. Productivity gains due to constant capital growth would have reduced prices and improved our sort immeasurably. It's a testament to capitalism that things have improved as much as they have despite the government's interference and currency debasement.

liberalarts November 6, 2010 at 5:31 pm

I have noticed that right wing friends and acquaintances all assume the opposite: inflation is a certainty with just a question of when it will happen. This seems odd to me, since a belief in markets (which I generally believe, and right wing people _always_ believe) suggests no imminent inflation based on current bond pricing. It is a weird disconnect.

Bill Stepp November 6, 2010 at 6:11 pm

Re: inflationary expectations, some TIPS (bonds with inflation protection) were recently sold with negative yields. They'll pay off only if inflation rises, which evidently the buyers think will happen. The price of gold, another possible inflation harbinger, is also rising.

Sam November 6, 2010 at 7:22 pm

Technology, the global labor force, the attacks on unions, the fiscal crisis of the state, the Euro all contribute to deflation.

Add in growing ecology consciousness and an indifference to status consumption.

In Japan there is also the fear of external resource dependence (Japanese barely use air conditioning as an example).

topgun November 6, 2010 at 9:43 pm

True for highly developed economies which already have a high standard of living. Not true for the world as a whole, especially emerging markets such as China and India.

Foobarista November 6, 2010 at 10:12 pm

I've often thought this is going on in numerous markets.

A related story is one of the principals on "American Pickers" on the History Channel pointed out that once very-local markets in collectibles with numerous arbitrage opportunities are now a single national or world market, where prices have generally crashed and arbitrage opportunities are hard to come by. So, it's great to be a buyer as you can actually do things like build 100 year old motorcycles from all-original parts, but much harder if you're an "investor" or trader who holds inventory.

(he didn't say it quite this way, but this is what he meant)

Andrew November 6, 2010 at 11:58 pm

Look at commodities and there IS inflation. We are going to have inflation and deflation at the same time. We already have it. Deflation in labor and inflation in real goods. On the bright side, this will give economists something to try to explain for another generation until the next thing they decided was impossible comes along.

Jules November 7, 2010 at 12:49 am

Checking some numbers, it looks like the Japanese had some low inflation years in the 80's, then it picked back up in the 90's, then crashed in 99. So – "lost decade," not "lost 3 decades."

Broadly, though, whether we call deflation "secular" is part of choosing whether to live with a persistent output gap. I vote no, but my vote doesn't count. You have to be OK with a persistent failure of collective will and morality in order to have a "serious" opinion these days.

Ricardo November 7, 2010 at 2:32 am

This may apply to the U.S. and other rich countries, but I see exactly the opposite phenomenon in poor countries. There was a show on BBC a while ago about a Filipina who was working as a housekeeper for very little money in the U.K. while her children were back in the Philippines. The reporter followed her on a shopping expedition where she went to a department store and bought a huge number of T-shirts, stuffed them into a cardboard box and paid a good chunk of change to ship it back to her family.

The puzzled reporter asked her why she was paying 10 or 20 pounds for T-shirts and even more to ship them when her family could presumably buy shirts in the Philippines for a fraction. She responded that her children insist on imported, branded clothes!

babar November 7, 2010 at 3:37 am

now rich people compete by consuming in a conspicuously inconspicuous way. this started to happen about the time that tryst-fund hipsters lost irony; irony started to adsorb to the upper class.

Bas November 7, 2010 at 6:09 am

Artificially flattening the yield curve will render inflation expectations largely invisible until the Fed stops its Treasury purchases. And how will it know when to do that?

a November 7, 2010 at 11:47 pm

"Deflation in labor and inflation in real goods."

IMHO I'd change this to: deflation in labor and inflation in assets.

tarun November 8, 2010 at 6:22 am

You are ignoring the counter-snobbery aspect and the costs associated with buying cheaper.

1. To find that super-obscure, amazing Ethiopian restaurant usually takes time and can involve vast expenditures of human capital. Just go to Chowhound and see how many people will review every single restaurant on a particular genre in one post.

2. Price signalling is pretty flawed anyway as a measure of actual quality. Prada can sell nylon backpacks at large prices and undoubtedly spends more on marketing than product. It wouldn't be surprising that people would actually prefer again to spend human capital on researching brands for quality and save on the marketing part of the equation.

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