As HB has pointed out numerous times, for several years, monetary inflation did *not* affect retail prices much. But it did cause enormous pricing pressure in equities. Later, in real estate. Increased demand can affect prices, and monetary inflation can increase demand. In bubble economics, it causes a distortion in the bubble-affected area of the economy because of the herd/bubble mentality and the excess liquidity.
Similarly, monetary deflation will not simply affect retail prices nor do so uniformly. Equities could be affected severely in order to transfer money from the stock market to consumer purchases (to maintain a standard of living). Then a reverse wealth effect may take hold in which consumerism is throttled by consumers feeling like the good times are over. That, in turn, could start a downward spiral.
It mattered where the liquidity sloshed; and conversely in a deflationary environment, it will matter from where the liquidity drains away. I believe it will be in real estate and discretionary consumer items firstly. With the overcapacity in the housing sector and in items like consumer electronics, the downward pricing pressure will be enormous. People, throwing caution to the wind, obviously bought more cars than they needed, and more often, and so the recent retrenchment has been significant and has exposed the weak players, GM and Ford.
Restaurants are discretionary, and so grocery stores could see increased demand for the "raw materials" which are 10x cheaper, so it's actually possible that food prices will not deflate at all, while things like HD TV's will see their price deflation accelerate until a bunch of producers go bust (like Konica Minolta yesterday in the camera business). |
