What is Deflation?

Most of us have seen the term “inflation” in the news recently, which means that your money doesn’t buy as much of something as it used to because of a general increase of overall prices in the economy. 

The opposite of that is “deflation,” when prices decrease and your purchasing power increases, aka you can buy more now than you could yesterday.  This seems like a good thing, right?  Well, deflation can signal a decrease in the market leading to potential unemployment increases, less consumer spending and less money going into the economy.

The main cause of deflation has to do with supply and demand.  If there is less demand for goods and services, the prices of those items will decrease as the producers try to sell them to consumers.  With a decrease in demand comes decreased spending from the consumer population.

Some investment sectors that may help hedge against deflation are utilities, health care, or agriculture, which are considered defensive industries.  Defensive industries are relatively stable during economic volatility and are typically considered necessities by consumers.  In addition, investment-grade bonds can help hedge against deflation.  One of the best ways to hedge against deflation is to maintain a diversified portfolio.

If you have questions about how to help protect your portfolio, please complete the contact form at the bottom of the page!

All investments involve risk, including possible loss of principal.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.  Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.  Bonds are subject to market and interest rate risk if sold prior to maturity.  Bond values will decline as interest rates rise and bonds are subject to availability and change in price.