Mixflation – Inflation plus delfation equals biflation – What?


Or everything you need to know about prices changes, but were afraid to ask.

Biflation or mixflation is when, somethings on the store shelves are going up in price and somethings are going down in price.  This makes sense, yawn. You might say this is a normal situation.  However, what we have now is anything but a normal situation. The difference between stable prices, with small changes in prices for individual items, and mixflation is, the latter affects the average person in a more dramatic way. It gives people butterflies when they go to the shop, like the first dip on a roller coaster you regret you got on to.  This is because although the average price level is stable,but individual items have erratic swings. This makes it hard to plan a budget, sell a home or do anything when your salary or income is near the same level year to year. The cost of goods sold are stable like a roller coaster and your in the back car.

Prices are like the weather

Consider a day that the temperature is 80 degrees and sunny out. Then a huge wind and hail storm hits and the temperature falls to 50 degrees in a few hours and the sky is dark. The average might be a pleasant 65 degrees that day, but it is too unstable outside to plan anything is it the weathers persists in this pattern. This is what Mixflation does to the economy.  I am surprised more people are not talking about prices in this way. In contrast people are trying to predict inflation or deflation.

Uncertainty and instability is hurting the economy as a lot of economics is based on expectations. Here is a great video on that sums up the uncertainty about aggregate price levels and the economy.

Housing, food and gas prices

Turning to a more concrete example, the aggregate price level could appear fairly stable with mixflation, because it is just that, a statistical average. That means as economics and policy makers look at the price level there is not much change. However, the average guy hears this news and wonders how that could be. What if he needs to sell his house and the market is tanking. What if is month to month food, gas and medical budget is increasing beyond his salary? He is in trouble.

Consider this with mixflation, what might really be happening is food prices have a quarter to quarter hike in price for several years straight. This is not good for the consumer.

While simultaneously housing prices are falling (eroding expected retirement wealth as well as pressure on those who lose their job and can not pay the mortgage. In times of slow wage growth means it is a double squeeze on many people’s pockets. It is deflation and inflation. This is in contrast with a stable price level. Again in aggregate you might not see much change in the CPI but in reality it means pain for the average guy.

Mixflation – Where is the good news in all this?

The first thing is price movements are nothing more than a reallocation of wealth or at least wealth flows.

It means that some people win and others lose. You have to make sure that you position yourself and protect yourself by being on the winning side. The problem is consumer goods do not have good hedging options in themselves.

  • How to beat inflation and deflation – The good news if you are an investor in stocks, futures or options you can play these price movements. You can play currency exchange rates (the relative price of money), Interest rates (interest rate futures) commodity prices (gold, oil, grain futures), stocks (companies that are benefiting from outsourcing or off shoring and price of labor decreases), REITS (real estate), you can short or use put options. Every price change is opportunity. Mixflation might affect your budget when it comes to cashflow but it does not need to prevent you from making profits in the market.

So are pricing rising or falling?  Will there be Q3? Quantitative easing, printing money and the debt is the argument for inflation. Weak demand, outsourcing, improved efficiencies, and run away prices from the last boom above the shilling index is the argument for deflation. The Federal Reserve is clueless, as markets not the government should regualte money and prices not the Chairmain of the Fed, but that is another topic.  So what will it be inflation or delfation? I think both or biflation. Housing prices and wages are falling and food and energy prices are rising. As a whole the pie is not growing, but redistributing. Just make sure you are on the winning side of this round of musical chairs by investing.

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