Wednesday, June 16, 2010

Matthew Green Weighs In On Biflation

Yesterday, Dian L. Chu argued that the U.S. was going in to "biflation," which some commentators assumed was stagflation in disguise. Today, Matthew Green argues that both are possible. After pointing out the difference between the two, Green points out that the tilt seems to be towards inflation. The chief impetus to biflation is the residential real estate sector, where bulging inventories are expected to hold prices down for some years to come. Also contributing to biflation is consumers being strapped, largely a result of stagnant wages.
So what’s the verdict? I think it is reasonable to say that our economy is showing both ingredients of biflation, regardless of a universally-accepted definition, and preliminary signs of stagflation as well. The prices of oil and food staples are rising, so despite marginally positive CPI readings, inflation is higher within the sector of essential items. Simultaneously, the relative lack of credit is still a thorn in the economy’s side, and with the first-time homebuyer tax credit coming to an end there is potentially another down leg coming up in real estate. If figures begin to tilt to the deflationary side, central banks may increase their intervention once again, propping up sectors of the economy that are experiencing deflation but having the inverse effect on the inflationary sectors. Along with rising worldwide demand for food and commodities, it could become a vicious cycle of biflation, and indeed stagflation, until real estate begins to rise on a sustained basis, and rates are raised to the point that prices can be contained without impeding economic growth. Needless to say, the issue of raising rates with the situation at hand is, and will be, a heated debate topic if inflation does take over. Until then, the tug-of-war will continue in more than one way.

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