Monday, June 14, 2010

America Ridden By "Biflation"

Dian L. Chu, after looking at the CPI, PPI and raw-material price index, as well as the currently shrinking M3 money supply, says that the U.S. is currently undergoing "biflation:" inflation that hasn't spread over the entire U.S. economy.
Biflation is a state of the economy where inflation and deflation occur simultaneously.

The price increase of commodities is caused by the increased money flow (via loose monetary policy) chasing them. On the other hand, the growth of economy is tempered with high unemployment and decreasing purchasing power. This has resulted in a greater amount of money directed toward essential items (inflation) and away from non-essential items and things that require credit to buy, such as houses and cars (deflation).
She says that greater rates of increase in prices of goods higher up the supply chain indicate inflation is in the pipe.

Two commentators wondered if "biflation" is just a neologism for stagflation.


  1. Biflation and Stagflation are very different concepts.

    "Stagflation" is high interest rates and high unemployment.

    "Biflation" is price inflation of commodity assets and price deflation of non-commodity assets occurring simultaneously.

  2. Thanks for the clarification. Another interpretation is demand shifting to commodity-oriented sectors (and products in the pipeline) and away from non-commodity assets and certain classes of consumer goods. A reordering of the demand constellation, to put it more simply.

  3. As someone who follows the Austrian School of economics, I believe that the tern “Inflation” is at all times a monetary phenomenon: inflation is created when more debt is accrued and, consequently, more money is created. The Austrian definition is at odds with the most common view of inflation that asserts the phenomenon is a “…general increase in consumer prices”. However, the Austrian definition does account for the rise of prices due to the creation of money, it just doesn’t insist that it be manifested generally.

    For example, for about the past 10 years, I maintain that the United States has been experiencing massive inflation. Now, this inflation may not be manifested in the everyday good we buy at the grocery store, or the local Wal-Mart, nevertheless it is manifested in the prices of goods and services. Where? Well…for the last 10 years, let’s look at some goods and services that have definitely been inflated (and some which have been deflated a bit, too):

    Crude Oil

    Now…it can be argued that we are seeing “Biflation” since Housing and Stocks have recently had their bubbles popped, but – look again! As the Housing Bubble has popped, the price Crude Oil shot up and stayed high, and the price of education and Healthcare continue to rise. In other words, when the prices of some goods have dropped, there has been a corresponding rise in the price of other goods to make up the difference. Also, if you’ve been shopping at the grocery store lately, you’re starting to see prices rise a bit there, too.

    Currency Inflation never sleeps: it always manifests itself in the rise of prices, and we are seeing that today. Beware of the accepted economic theory that should so confine the definition of inflation that it would be impossible for you to recognize it when it happens. If you want to know if Inflation is happening, look at either the amount of money that is being created, or the amount of debt that we are accruing – it’s the same – and either will tell you whether or not inflation is happening.

  4. Yes, John, you're right. One of the trickier points to grasp is that a bubble is really inflation confined to a particular sector. With respect to the stock market, inflating in the face of productivity improvements to "stabilize" the price level does inflate the stock market. That's why successful "stabilization" when prices should fall due to higher productivity has always produced a stock-market bubble.

    No wonder Irving Fisher lost a fortune in the stock market after the '29 crash...