Personal Wealth Management / Expert Commentary

Fisher Investments Reviews if Cooling Inflation Should Leave Investors Concerned About Deflation

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher, takes a closer look at the current state of inflation and examines whether we could see deflation—a decrease in prices over time. Ken believes that while inflation is cooling, deflation is improbable.

Ken says central banks are averse to deflation, which is painful for people and is typically associated with recession. Deflation can lead consumers to spend less in the present as they may expect prices to continue to fall, which can have negative implications for businesses and consumers. Ken explains how central banks have stopped increasing, and in some cases, even reduced the quantity of money—but not enough to cause deflation. If signs of deflation were to appear, Ken says central banks would likely take swift action to course correct, increasing money supply.


Ken Fisher:

So with inflation coming down

and remember that what inflation normally does is get measured as

a function of current prices versus 12 months ago,

not current prices versus some longer time ago.

So the annual inflation rate is showing you what's happened just now.

And not what's happening cumulatively over time.

So I hear people all the time say to me, well, you say inflation is going down,

but look how high prices are in the supermarket.

Well, the prices in the supermarket are the accumulation of inflation over all

the period since the pandemic. And for that matter, before and that.

Bulged by a huge inflation caused by central banks around the world,

increasing the quantity of money hugely and stupidly in response to Covid.

At the time that the economy was locked down

so people couldn't even really spend it at the time,

which didn't generate immediate inflation.

But as the economy opened up and people could spend more

and more of whatever it was,

that they had became evermore higher inflation in 2021 into 2022.

The reality of the lower inflation rates that we have are because

the central banks  of the world have stopped increasing the quantity of money.

And in some of them, like in the United States,

they've actually made the quantity of money shrink just a little bit.

And when you make the quantity of money shrink,

you do run the potential that you get actually a head at some point in time,

which I do not expect. Prices to actually fall, which would be deflation.

Are we going to have deflation? Is that what's ahead? I don't think so.

I don't think so for a couple of reasons.

One, the shrinkage in the quantity of money depending on how you measure it.

And these money measures are not precise. They're not exact.

This is stuff that's more like ballparking than it is precision.

The negative bit is small.

They  haven't really shrunk,

shrunk the quantity of money by any measure you can measure by a lot. Secondarily.

If we start to see any sign of deflation.

They'll flip that around and start increasing the quantity of money.

That would actually be a little bit scary. But they do not want deflation.

Central banks do not want deflation. They never want deflation.

Deflation to people feels like pain because with it comes often unemployment.

Recession. Et cetera et cetera.

Central banks want the inflation rate to get down to about 2% .

I don't know why that's the right number.

I don't know why they believe that's a good number.

It's a number they believe is good. And that's what they're aiming for.

And in aiming for that number.

Anything that gets drastically below that I'll try to bring it back up.

The reality is they're not very good at doing this stuff.

And if you've heard me times in the past,

I've been almost endlessly critical of the process by which central banks of

the world attempt to control the quantity of money and what they do with that.

They're really not good at doing this stuff and they really can't get that lesson.

They can't let it be what it should be, which is keep it simple.

Grow the quantity of money at a very low, steady state.

Let me take you back to that for a second. If they really wanted

2% inflation in the long term.

And if they really thought the economy was going to grow at.

You pick the number depending on the economy in America,

maybe two and one half percent a year. Then they'd add those two numbers together.

Two and two and a half. They'd get to four and a half,

and they'd grow the quantity of money at four and one half percent a year forever.

And they wouldn't let it go up or down much. They never learned to do that.

The fact is, they're a little bit like Milton Friedman used to say when I was young.

Legendary monetary economist.

They're a little bit like kids at an amusement park in the bumper cars.

They can't keep their feet off the gas and the brake.

They can't keep themselves from trying to turn the steering wheel.

They just keep running into things.

But the reality is they do that adjusting all the time.

And I don't believe based on

the way they react that they will ever want in major nations serious deflation.

So that's not going to happen. We will get the inflation rate down to 2% .

It's coming down. Or I should for you, I should do it this way.

It's coming down at an irregular but steadily lower pace.

It's a global phenomenon, not just a US phenomenon.

It's always a mistake to think of it only in your own country.

Europe's actually leading the way right now.

At the beginning of this year, Europe had a higher inflation rate than America did.

America was already starting on the way down,

although people didn't believe that at the time.

And now Europe's actually got a lower current inflation rate than we do in America.

But on the other hand, some place like Australia has got to higher one.

And Australia is normally a country that, because of the makeup of its industries,

lags the inflation tendencies of the rest of the world comes to them later.

Some people say, and they're wrong. That.

Rising wages, which is happening now, will cause more inflation ahead. No it won't.

We have a very long history of wages. We have a very long history of inflation.

And it was proved when I was very young.

And it's been true ever since, that wages follow inflation.

They don't cause inflation. Inflation comes first. Wages lag.

So we're seeing wages going up while inflation is falling.

But the little decrease in

the global quantity of money that central banks have allowed in

a global world where countries are trading all over the world,

is going to keep the actual inflation rate moving toward that 2% level,

and it's not going to get a lot below that, pretty much, no matter what they do.

And they're not going to let it get a lot below that.

So deflation is not in the cards. I've talked too long.

I hope it wasn't too boring for you. Thank you for listening to me.

I do appreciate it. Hopefully it's useful for you. Hi, this is Ken Fisher.

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