Inflation vs. Deflation: One man's thoughts

From the blog Up In The Crow's Nest where he discusses Inflation vs Deflation

The Inflationist: “The Fed’s money printing and other government spending must create inflation. And even if they don’t, the government will just up the ante until it does.”

The Deflationist: “But the output gap is huge! Until that closes, no one can raise prices and you certainly won’t see an inflationary wage spiral. Inflation just can’t happen until the output gap is much smaller.”

He goes on to discuss how trying to fit our large, complex input/output economy into a universal label such as deflation or inflation is folly.

Most commentators have therefore reconciled these two plausible arguments by concluding that we will get deflation for some time, then inflation. And, if the Fed gets it right, the inflation will be contained by various tightening maneuvers. So, inflation can’t happen here, right?

Probably wrong. Obviously no one will be surprised when the Fed moves too late to smother the seeds of inflation. But it is also possible that inflation happens before the overall economy is particularly healthy—in other words, stagflation. Here’s how.

Head on over and give it a read. Each individual sector of the economy will experience their own inflationary or deflationary pressures due to each sector's unique attributes.

He concludes

The point is that it may not take the wholesale recovery of the world economy to spark a faster-than-expected drawdown of stocks in certain commodity sectors and generate a “completely unexpected” surge in their price. When could this happen? If the economy has indeed hit bottom, and now grows very slowly, this would likely occur in 2010. If China’s recovery derails, as some commentators have recently suggested as a possibility, then all bets are off.

But once underway in the broader commodity sector, any employees with hard-to-replace skills will have the leverage to demand an increase in their wages to match the increase in the basic cost of living. Political leverage, such as Democrats still controlling the White House, could result in cost-of-living increases in various government benefits. The price/wage spiral will have begun—despite potentially millions of people still unemployed.