Biflation: The Case of the Two-face

Depressing data from the US made double-dip recession a trending topic among market nerds. This got others debating on the biggest problem of the US economy. Is it rising prices or falling demand? Inflation or deflation?

Thanks to a fancy dude named Dr. Osborne Brown, we can now call the event of simultaneous inflation and deflation as… BIFLATION.

It’s no joke, folks! Biflation is inflation and deflation occurring at the same time in an economy. Global commodity prices can shoot up even as prices of debt-purchased assets like houses and automobiles tumble.

Sounds familiar? It should! Inflation in the commodities market is just one of the many problems of the US. Oil prices are holding at around $80, copper is up about 14% from last year, and wheat prices have hit the ceiling! Because demand for commodities remains strong, prices for these goods are skyrocketing as there is way too much money chasing them.

At the same time, we’re seeing signs of deflation in debt-purchased assets. Take the housing market for example. Since December of 2009, home prices have fallen for four out of the last seven months. In fact, just this June we saw another 0.3% downtick in home prices. What gives?!

Something tells me the Fed may have something to do with this. They used to give tax credits to home buyers to boost demand, but now that these housing tax credits have expired, demand seems to be drying up. It probably shouldn’t come as a surprise that house prices are falling now that we’re seeing more average Joes living in their parents’ basements!

If you think about it, weak job growth and excess manufacturing capacity in the US presents a really good case for deflation. I guess that’s why many are expecting to see the prices of debt-purchased assets continue to fall. But on the other hand, rising commodity prices also makes a strong argument for inflation.

So which “flation” do we really have? Well, it’s hard to say now that we’ve seen both sides of the coin. There is really no lesser evil between the two, but I suppose we’ll just have to wait and see which problem will eventually take over. In the meantime, it looks like we’ll have to settle for the two-faced biflation.

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