Why Inflation More Likely Than Deflation in the U.S. Economy

Deflation in U.S. EconomyIn the first four months of this year, January to April, prices in the U.S. declined by 0.2%. But this shouldn’t be a reason to jump to the conclusion that deflation will prevail for the U.S. economy. (Source: Bureau of Labor Statistics, last accessed May 31, 2015.)

Probability of Deflation in the U.S.: Zero

The Federal Reserve Bank of Atlanta calculates the probability of deflation by using the price of Treasury Inflation-Protected Securities (TIPS)—inflation-protected U.S. government bonds. Right now, it says the probability of the consumer price index (CPI) on April 15, 2019 being below its April 15, 2014 level is zero! This probability hasn’t changed since last year. (Source: Federal Reserve Bank of Atlanta, last accessed May 31, 2015.)

Looking at other ranges, probabilities are also zero. The probability of CPI on April 15, 2018 being below its April 15, 2013 level is zero. Here’s something interesting to note: in June of 2013, this probability was over 12%.

If anything, this tells us that deflation was a risk in 2013; not now.

What’s Really Ahead for the U.S. Economy?

As I see it, deflation is a very unlikely scenario for the U.S. economy in the long run. In the immediate term, lower oil prices and a rising dollar will put downward pressure on prices. But in the long term, I expect significantly higher inflation for three reasons:

1. Too much money printing

2. Rising government debt

3. U.S. dollar losing its reign as the reserve currency of foreign central banks

The monetary inflation happening in the U.S. economy has the potential to send prices soaring. The U.S. government isn’t helping the situation, as it maintains its “spend what we don’t have” policy. Looking back in history, whenever governments spent without remorse, it caused a negative impact on the country’s currency value. The U.S. national debt currently stands at $18.0 trillion (almost $8.0 trillion of that amassed under Obama’s two terms in office), and the debt is only expected to increase.

Finally, the greenback is losing its dominance—slowly but surely. Pay attention to the news and you will see there’s a movement brewing about countries trading in their own currencies, building their own currency transfer systems, and setting up organizations similar to the International Monetary Fund (IMF) and the World Bank. If this continues, the U.S. dollar’s value will be impacted.

The Real Problem: Inflation

When I look at the big picture, I am concerned about skyrocketing inflation. It hasn’t shown up in government figures, but those of us who go out on a regular basis and shop know this very well: in situations where prices haven’t changed, the size of the container has gotten much smaller. This is inflation.