Three Reasons Why Lower Oil Prices Won't Lead To A 'Deflationary Spiral'

BI ^ | 2-1-2015 | Myles Udland

[blam]

Myles Udland
Febuary 1, 2015

Economists and central bankers hate deflation because of "deflationary spirals."

A "deflationary spiral" occurs when lower prices cause consumers to wait for even lower prices, creating excess production capacity, excess inventory, and ever-lower prices and so on. It is a circular pattern.

In a note to clients last week, Bank of America Merrill Lynch economist Ethan Harris took to task the idea that the deflation — or really, disinflation — that we're seeing due to the crash in oil prices will lead to a much-feared "deflationary spiral."

Harris outlines this basic sketch as what some members of the press, the analyst community, and even central bankers have said are the dangers of lower oil prices:

(snip)

[AEMILIUS PAULUS]

Lower gas prices means more money in the pockets of consumers and transportation people(truckers.) This will stimulate other industries. The issue being will the stimulation of industries offset the loses incurred by the oil people?

[Star Traveler]

I think the drastically lower oil and gasoline prices are GREAT NEWS for the consumer!

[Maine Mariner]

Finally an article by an economist that actually made some sense. My fuel bill is $200.00 less this month (fill up 3 times a year) The price I pay at the pump is about $30.00 less each week. We are saving money to purchase items and paying off debt with the extra money. So falling crude prices have helped a lot. Pump prices for regular unleaded have fallen from about $3.85 to $2.08 in Bangor ME during the past year.

[Raycpa]

We have been in deflation for a few years.

[C210N]

So, what would be next? Gold heading towards $0 an ounce as people wait till tomorrow to buy it?

[Pilgrim's Progress]

Isn’t a “deflationary spiral” something that Tom Brady will be throwing today during the Super Bowl?

[LostInBayport]

We have a winner. No more calls, please.

[9thLife]

Good little piece. Deflation may be a concern, but not from falling oil prices.

Plus deflationary fears seem to ignore supply-side theory.

[9thLife]

Isn’t a “deflationary spiral” something that Tom Brady will be throwing today during the Super Bowl?

Only if it feels anachronistic.

[RegulatorCountry]

The trouble in deflation is in secured debt. Houses, equipment, vehicles and such. If retail gasoline prices, heating oil and the like don’t lead to that it’s broadly a good thing, but not a good thing for the oil patch in general and the fracking revolution in particular. I’d feel better about it if the decline had settled in at a minimum that would keep those guys booming, personally.

[Pelham]

What connection do you see with supply side theory?

[9thLife]

Supply > Low prices > demand.

[Pelham]

A deflation is caused by a collapse in the money supply. It’s a monetary phenomenon.

A fall in oil prices isn’t a deflation.

[TWhiteBear]

We are paying about 1/2 in fuel bills per week. This, for us, is mostly disposable income. That allows us to get more of the necessities by buying in bulk at a lower per unit cost.
And we also buy a few fun things, more than when gas was $4.25 a gallon.
The twist in the analysis is that my wretched state is now hot to raise any and all taxes of gasoline.
The politicians and bureaucrats are visioning new, even shaggier carpets in the State buildings and only the plushest of drapes on the windows.
Carpe Dium and all that.
TWB

[DanZ]

“Lower gas prices means more money in the pockets of consumers and transportation people(truckers.) This will stimulate other industries. The issue being will the stimulation of industries offset the loses incurred by the oil people?”

Lets poor some cold water on you here.

The U.S. Economy have grown ONLY in the Oil & Gas sector the last three years. These are WELL payed jobs. Go back to 1980-1985 and you will see what is about to hit the U.S.

With the 40-50,000 announced lay-offs in the Oil&Gas business there will be a major recession.

[AEMILIUS PAULUS]

If you recheck my post I asked a question. I did not make an assertion.

You seem to be of the opinion that the loss incurred by the oil people will NOT be offset by gains in other sectors of the economy.

[Little Bill]

I am going to get beat for this: deflation is good, it sets the value of money vs goods. We have been in an inflationary economy since 1963, lets let the market decide.

[DanZ]

“You seem to be of the opinion that the loss incurred by the oil people will NOT be offset by gains in other sectors of the economy.”

The only businesses that had CAPITAL spending the past three years were in the Oil&Gas area.

When Capital spending drys up you get a nasty recession.

If you are aware of any industry that is doing Capitol investment please speak up. I have money in the market.

[reed13k]

I always understood the deflation problem to be associated with inventory. Manufacturers and providers invested into parts/inventory/equipment at one price, but by the time they sell it, it has dropped to a lower price resulting in 1) a sale with no profit and 2) an inability to purchase new stock at the same volume as previously with what funds were recouped.