Biflation

  

Categories: Econ

Prices can move in two general directions over time. If they go up, that's called inflation. If they go down, that's called deflation. (Theoretically, they could stay the same, but given the complexity of the economy, having literally stable prices for any length of time would likely prove impossible.)

So typically, we're talking about an either/or situation: either you've got inflation or you've got deflation. However, a scenario known as "biflation" can occur when both inflation and deflation are happening at the same time.

Obviously, prices for a single thing can't biflate; individual prices can only go up or down. But, if prices for some things go up while prices for other things go down, that's known as "biflation."

The term was coined in the 2000s and got traction in the period after the 2007-2008 financial crisis. In the wake of the subprime mortgage meltdown, housing markets in many regions were depressed. That meant that, on average, the housing market saw deflation for a period of time. Meanwhile, elsewhere in the economy, prices for things like crude oil and gold were rising. Hence, biflation.

In a certain sense, biflation is always happening. Even in an overall inflationary situation, there are likely to be some prices falling even as most other prices rise.
Computer prices, for instance, have fallen substantially over the past 20 years or so. New technologies and manufacturing processes, combined with competition, continue to push prices lower. However, the general trend for overall prices in the last 20 years has been for steady price increases, which is fairly typical (the Federal Reserve and any other competent central bank calibrates its monetary policy for steady, low-grade inflation).

So, computers may go down in price, but many, many other items have continuously gotten more expensive over the years. This leads to the general trend that has been steady, mild inflation.

When to pull out the term "biflation" then? The reason "biflation" got used during the post-crisis situation, and not to describe situations like falling company prices, is that housing makes up an important part of the economy. With such a sizable chunk of people's expenses and/or assets suffering sharp deflation in the post-crisis years, it had a much more dramatic economic impact than the usual dips in prices for certain products here and there.

It's one thing when you can buy the equivalent of last year's $400 computer for $375. It's another when your $300,000 house is suddenly worth $200,000, if you can sell it at all. It complicates the overall pricing situation enough that a term like "biflation" becomes appropriate, because the vanilla characterization of "inflationary" doesn't tell the whole picture as well as it typically does.

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