Biflation

Biflation is a term used to describe a period where some prices are rising and some prices are falling. It can appear we have both inflation and deflation at the same time.

Biflation usually involves an increase in commodity prices, but a fall in asset prices and a fall in price of non-essential goods.

To a large extent this explains the recent paradox of high inflation and concerns over deflation many major economies have experienced..

In a depressed economy, demand for essential commodities (like food) will remain relativelyhigh. Therefore, the price of these goods can increase. However,if there is a fall in economic growth and rise in unemployment, there will be a substantial fall in demand for expensive assets such as houses. Therefore, it can be possible for house prices to fall, whilst demand for basic commodities continues to rise.

In recent years, this contrast between different sectors has been exacerbated by international factors.

Commodity prices have been rising because in the developing world (emerging economies like China) growth has been strong and therefore commodities have been in high demand pushing up prices.

However, the West has experienced a financial crisis and deep recession. This financial crisis has led to a shortage of finance and falling asset prices. Also the lower growth has led to higher unemployment and deflationary pressures, putting downward pressure on prices. Yet, although there is deflationary pressure, we have experienced higher commodity prices because of strong demand in other parts of the world.

This explains the paradox. Energy, oil and food prices have been rising substantially above the inflation rate.

Yet, the price of many other goods have been falling, indicating deflationary pressure.

What is The Real Inflationary Pressure?

When you have rising commodity prices and falling prices of other goods, it can be difficult to work out whether inflation or deflation is the real problem.

However, there are a few things to examine.

  • Level of spare capacity. If economic growth is well below the trend rate of growth, there is a negative output gap. This will keep underlying inflation low.
  • Wage Growth. If inflationary pressures are strong, workers will be able to demand higher wages. These higher wages will cause inflation to be strengthened and cemented.
  • Inflation expectations. Do people expect inflation to remain high?

In the current climate, the evidence suggests that inflation remains just a short term issue. There is still a negative output gap, high unemployment. Wage growth is very low and inflation expectations haven’t changed. It suggests that the high CPI is due to commodity inflation and therefore just a short term factor.

Stagflation

Biflation is a similar concept to stagflation. Stagflation refers to falling GDP / stagnant economy, but inflation at the same time. If you have inflation and very low growth. The inflation will be caused by temporary cost push factors (e.g. higher oil prices) and not the usual demand pull inflation.

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