How can we have Inflation and Deflation at the same time?

May 14, 2008

In common usage, deflation is generally considered to be "falling prices" while Inflation is "rising prices".  Actually this is "price inflation" as opposed to "monetary inflation".  For more information see What is Deflation? and What is Inflation? and Inflation Cause and Effects.

So if inflation is rising prices and deflation is falling prices, how can prices rise and fall at the same time?  Somehow that seems counter intuitive.

Obviously, when the Bureau of Labor Statistics comes up with the Consumer Price Index it is either higher or lower than the month before so we have inflation or deflation.

But that is the number for the whole economy, it includes over 10,000 items and takes into consideration all aspects of the economy.

However,  every month some prices are rising while others are falling.  So the inflation rate is a compilation of all of these factors.  Currently,  we have some major inflationary forces combined with some deflationary forces. 

On the inflationary side we have rampant money creation, and dollar devaluation compared to other currencies. This is causing prices for food and energy to skyrocket.

On the deflationary side we have the sub-prime fiasco which is reducing liquidity for banks and causing housing prices to fall.

So there you have it, rising food and energy prices and falling housing prices...  inflation and deflation at the same time.

Tim McMahon, Editor

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