These days, inflation fears are out. What's in? Concerns about prolonged deflation, a persistent and general decrease in prices.
While deflation may not sound so bad at first -- in mid-December, gasoline prices were down nearly 60% from July's record highs and holiday discounts abounded -- but it can have serious consequences for the economy and your wallet.
Deflation vs. disinflation: Deflation differs from disinflation, which is a mere slowing of the rate of increase in prices. That's an important distinction. Disinflation can be good for the market. A study by the Minneapolis-based Leuthold Group found that from 1872 through the last deflation threat in 2002, the S&P 500 posted a 15.3% gain in years of slight inflation and a 14.6% advance in years of flat to mild deflation.
By contrast, prolonged deflation can turn into a self-fulfilling downward death spiral, as it did during the Great Depression and during the 1990s in Japan, which saw its stock market suffer a long descent during the "lost decade."How does deflation happen? When times get tough, consumers and businesses cut back on spending, which leads to downward pressure on prices as businesses try to attract customers. Those price cuts squeeze companies' bottom lines. They struggle with costs, debt and payroll; they cut production, and they lay people off. Consumers lose their jobs, or worry about losing them, and they cut back even more. And the cycle spirals on. Rate cuts and spending: In October and November, consumer prices fell at the fastest pace since the Labor Department started tracking them in 1947, as the deteriorating economy pulled prices down for oil, consumer goods, homes and stocks. What seems like a boon to consumers, however, has economists and analysts concerned.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV