Deflation in Action

Because it is a long commute from my home to InvestWithAnEdge.com Global HQ, I am particularly sensitive to gasoline prices. I look for the stations where I can get the best price without going too far out of my way. Earlier this year, when prices were approaching $4 a gallon, I found myself topping off whenever I saw a low price – even if I still had a half-tank or more left. Why? Because I was worried that prices were going even higher. Better to buy more while it was still “cheap.”

Now that gas prices are falling, I find myself doing the opposite. I’m waiting as long as possible to fill my tank, because I think there is a good chance gas will get cheaper soon. Sure enough, the price keeps falling and I’ve saved a fair amount of change this way.

Here in a nutshell you see the difference between inflation and deflation. In an inflationary environment, where prices are steadily rising, the consumer’s incentive is to buy now. When you see a bargain, you snap it up because it probably won’t last long. Americans have lived with inflation for so long it’s hard for us to think any other way.

Deflation is quite different. Your incentive is to wait, delaying all purchases because everything only gets cheaper. Buy what you need, when you need it, and nothing more. Unfortunately, this kind of thinking wreaks havoc in a modern economy – and it’s exactly what is happening right now.

For example, it’s already late November; have you done much Christmas shopping yet? Probably not. You’ve observed that the sale prices at your favorite stores keep getting better and better. You’ll buy your gifts at the last minute and save a bundle. Great for you, not so great for retailers. The spillover effect of millions of individual decisions like this spreads through the economy, and it hurts.

If you haven’t adjusted your thinking yet, you will. Here is a tip: open your eyes and look at gasoline prices before you buy. On the roads I drive, it’s common to see stations across the street from each other post prices that vary by 20-30 cents. Why people buy gas at these more expensive places, I don’t know. Ignore their stories about one brand being better for your car – it’s all the same gas. If you drive as much as I do, 20 cents a gallon can add up to hundreds of dollars a year. That’s cash in your pocket, which may be the best place for it.

photo credit: Jake Sutton