FINDING INFLATION in a deflationary cycle

with all the recent talk of deflation, its not that hard to find things that are going up in price. home prices, energy costs, insurance premiums, and healthcare costs all are rising. the reasons for the rise in each of these four areas is different, but an important point is that none of the reasons have anything to do with a strong economy. the reason thats important is that normally, prices rise due to strong demand and/or economic growth. that allows companies to have pricing power. that creates an enviroment where companies dont have to compete ferociously for business or market share, because as the economy grows, demand grows and prices can rise. what is happening in each of the above mentioned areas is very different from a strong economy.

lets start with housing. over the last 2 years, interest rates have been lowered and that makes it less expensive to 'carry' or finance the purchase of a home, even if the price of that home is raised. when interest rates move lower it costs less to pay for an asset that is financed, especially if you can finance 80-90% of the purchase price. that allows the property value to rise while the cost to carry it stays the same or goes down. home prices have not necessarily risen due to demand, as much as demand has risen due to the lower cost to own a home. so prices have been able to rise even while the cost to own a home has declined.

a similar phenomenom has occured with automobiles. the 0% financing deals make it less expensive to buy the cars even though prices have remained fairly stable. in fact, automobile companies have been quietly raising prices on the cars they sell, yet with the 0% deals, it seems less expensive to buy a new car since the financing deals are so great which makes the payments lower.

the next area that has seen inflationary forces is the cost of energy. oil, gasoline, & natural gas prices have all risen steadily over the past year. the reasons for the rise in energy costs dont matter except for the fact that none of the reasons include strong demand due to a strong economy. oil prices are up due to geo-political factors as well as supply problems. gasoline prices are up due to oil prices being up and supply and demand issues, most not due to a strong economic rebound. and natural gas has its own issues, some include more demand due to conversions that took place for companies and consumers wanting to move away from a dependence on oil.

the other 2 areas where inflation is prevalent is insurance and healthcare. one of which has an effect on the other. healthcare providers are paying more for insurance and are passing those costs along to consumers. insurers are charging more due to higher claims and more liabilities due to natural disasters which continue to occur at an ever increasing pace and with ever increasing claims. more disasters and higher costs to rebuild the destruction, costs insurers more than they are prepared for. also lawsuits run amok have caused insurers to have to payout more than in the past. as for healthcare costs, we are living longer and having ourselves repaired and improved more and more. as that continues and our society ages, claims will continue to rise and the costs will as well.

all these inflationary forces do not help the economy. each of them is a 'drag' on growth. whats worse is that the deflation that is so prevalent in other areas i.e. technology, furniture, appliances, food, clothing, etc. is effecting businesses profits and enticing consumers to keep spending. most of the spending is being supported by money they are pulling from their homes as homeowners continue to refinance and pull cash out of their ever rising home values. if the deflation starts to hit that part of the economy, homeowners will all go 'upside down' very fast. that in turn will create a deflationary cycle in the most valuable and important asset most of us own.

have a grateful day!

larry