“In the US we may be managing through a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it because it’s better for our customers.”
Doug McMillon, the President, Chief Executive Officer & Director of Walmart Inc.
The above statement was made during Walmart’s November 16th, 2023 earnings call and is the first serious statement anticipating deflation.
Long-time RealWealthConcepts readers know over the past several months I’ve speculated we could see people talking about deflation around now.
People have had enough of ridiculous prices.
Retail analyst from Chuck Grom: “Almost uniformly, consumers are pushing back on price,” citing Target Inc. and Macy’s Inc.
As purse strings tighten, consumers are switching from more expensive brands and products to cheaper substitutes.
“We are more cautious on the consumer than we were 90 days ago,” Walmart Chief Financial Officer John David Rainey told Bloomberg.
It’s too soon to say how far this deflation trend might go – it’s not a significant concern at the moment. Indeed if modest deflation is limited to packaged goods it might be beneficial for consumers.
However, it is important to pay close attention, as deflation can be just as dangerous as inflation if it gets out of control.
What are the negative economic consequences of deflation?
- Decreased Consumer Spending: Deflation often leads consumers to delay purchases in anticipation of further price declines. This reduction in spending can lead to a decrease in overall demand, further exacerbating economic slowdown.
- Increased Debt Burden: When prices fall, the real value of debt increases, making it more burdensome for borrowers. This is particularly problematic for those with fixed-rate debts, such as mortgages, because the payments become relatively more expensive over time.
- Reduced Business Investment: As prices and profits fall, businesses may be less inclined to invest in new projects or expansion. This can lead to reduced economic growth, lower employment levels, and a slowdown in technological progress.
- Wage Spiral: In a deflationary environment, businesses often cut wages or lay off workers to reduce costs, which in turn reduces overall consumer spending power, further decreasing demand.
- Asset Price Decline: Deflation can lead to falling asset prices, such as real estate and stocks. This can erode wealth for individuals and companies, leading to reduced spending and investment.
- Economic Instability and Recession: Prolonged deflation can lead to a deflationary spiral, where falling prices lead to lower production, lower wages, decreased demand, and further price declines. This spiral can result in long-term economic stagnation or recession.
- Market Sentiment: In financial markets, deflation can lead to a negative sentiment, causing investors to move away from riskier assets like stocks to safer assets like bonds, potentially leading to a downturn in equity markets.