The Covid-era economy was marked by the highest level of inflation in more than 40 years.
With inflation topping out at nearly 14% over a two-year period (2021-2022), there’s understandable hope prices might start falling.
For example, maybe that calorific cheeseburger and fries could go back closer to the $10 it cost in 2018, instead of the whopping $13 it cost in 2023?
Fat chance.
Based on history, next year the best you can hope for is a mouthwatering $13.50 cheeseburger/fries combo.
To digest this unpalatable reality, we need to chew on the difference between deflation and disinflation.
In the post-WWII era, there have been nary any times of sustained overall deflation – that is outright falling prices.
For some sectors of the economy - notably energy and technology - it can look like prices are prone to deflation.
However, over longer periods, even for gas and IPhones, the best we can hope for is disinflation, that is smaller price increases.
Daily fluctuations in the price of petrol, which we observe firsthand when we drive by the gas-station, often show day-on-day decreases. Realistically, however, gas prices have gone from ~$2.50/gallon in 2015 to ~$4.00/gallon today.
And as Moore’s law’s confirms, the prices of computers should be deceasing as technology advances. Yet, the average IPhone went from~$200 in 2008 to ~$800 in 2021.
Turns out, as technology advances, rather than craving less expensive phones, most of us covet more pixels and processors packed into that handheld.
Over the past year, central bankers and politicians have worked hard to foster disinflation, that is a slower rate of price increases.
Policy makers don’t like outright deflation, and maybe for good reason. The most recent time the country experienced sustained price drops - that is pure deflation - was that period we refer to as the Great Depression (1929-1939).
The hope prices might deflate and go back down to what they were yesteryear… We call that pie in the sky.
We're probably better off hoping for disinflation.
