What Does Deflation Actually Deflate?
Guess which one is the deflation price? (It’s not always clear.)
It’s complicated. Deflation and inflation are defined as cycles of falling and rising prices, respectively. Experts disagree on which force is more likely to overtake the economy, but either way, not every good or service will move in the same direction—creating confusing exceptions that make it hard to plan a family budget. To help make sense of it all, here are economists’ predictions—for both scenarios—about prices in five everyday areas:
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FOOD
Whether there is overall inflation or deflation, food is likely to cost more. Why? Americans buy their food in a global marketplace, and with demand intensifying in China and India, the cost of products like wheat could surge.
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CLOTHING
If prices for most goods in America go down, clothing will seem more expensive. That’s because it’s mostly made in the developing world, where demand—and prices—are rising.
If America experiences sharp inflation, clothing may seem cheaper than other products, because our cash would be worth more for foreign goods than domestic ones.
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MEDICAL CARE
Whatever the state of the economy, the costs of medical services are likely to continue to rise—just as they have for the past 40 years. In other fields, computers can replace high-skilled personnel. But in medicine, technology doesn’t take away the need for doctors and nurses.
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SERVICES
Deflation is likely to make services feel cheaper relative to other goods, because things like haircuts and carwashes are entirely domestic affairs—you can’t bring them in from abroad, and they can’t really be exported.
If prices rise, barbers have little buffer—they need to pay the rent and utilities—and will need to charge more relative to the cost of goods.
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GASOLINE
India and China have a growing need for fuel to keep their economies hurtling forward. Whether overall prices go up or down, trips to the pump are likely to hurt more as emerging countries exit the economic slowdown first.
Sources: Joseph Gagnon, Peterson Institute for International Economics • Mark Gertler, New York University • John Campbell, Harvard University
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