Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Financial Briefs


Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Understanding Deflation

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of
Legend Financial Advisors, Inc.®and EmergingWealth InvestmentManagement, Inc.

Deflation (It looks like Europe’s economy ismoving into a deflationary period.), although uncommon since the GreatDepression, normally occurs because there are too few customers chasing toomany goods and services, resulting in competitive price cutting that leads tolayoffs, falling wages, and a decline in business investment and consumerspending.  Consumers and businessesproject that prices will be lower in the future, therefore;they delaytheir purchases making the economic climate worse and driving prices andwages down further.  Households(decreasing wages) and companies (decreasing revenues) with extensive debtare still forced to meet their fixed monthly expenses.  Often, bankruptciesresult or spending is cut to meet their obligations. This is what happened inthe early 1930s triggering the Great Depression.  For the most part of thelast almost 25 years, Japan has faced deflationary pressures asprices fell.  This type ofdeflation is characterized as “bad deflation”.  On the otherhand, price declinesmay occur when companies find ways to produce goods and services more cheaply.  Theseproductivity gains are passed onto consumers in the form of lowerprices, onto workers as higher wages as well as onto shareholders as higher profits. This mild deflation may be considered “gooddeflation”.


Some see a strong possibility of mild deflation developingin 2014, in Europe, as the lackluster European economy continues to faceconcerns over excess capacity, weak employment growth, high levels of consumerdebt, and deflation being exported from the Pacific Rim countries.  The combination of these factors could lead to milddeflation in 2014.  However, historicallymild deflation alone has not been a negative to either the stock orbond markets.


If we face mild deflation [The Consumer Price Index(CPI) flat to down 2.4%], have no fear.  The 25 years of mild deflation in the U.S. since1872 saw the stock market rise on average by 14.6%.  Whensignificant deflation occurred (CPI was down 2.5% or more)stocks performed poorly with average total returns of just 3.9%. Periods of significant deflation are accompanied by a better“real return”, because the high deflation rate is added to the stock’sperformance.


All deflation is perceived to be badbecause it has beenassociated with past economic downturns.  However, not alldeflation occurs duringeconomic weakness.  Deflation may occur during the earlystages of an economicrebound, particularly when business confidence and inventory rebuildingadvances ahead of consumer demand. As the economyreverts back equilibrium, these deflationary pressures typicallyease.  Stock market performance tends to bebetter during non-recession years when mild deflation exists.


Long-term interest rates are typically higher duringhigh deflation periods due to weak economic conditions. Periods ofdeflation, whether mildor significant, usually tend to cause short-term interest ratesto rise to levelssomewhat higher than long-term averageinterest rates.


In summary, while serious deflation isalways of concern toeveryone, historically,mild deflation will not necessarilyprevent stocks from rising. However, not all periods achieveaverage returns either.

  • Inflation: A Portfolio Risk That Never Dies
  • Understanding Economic Fundamentals
  • A Bright Outlook For Consumer Spending
  • Six Tips To Avoid Phishing Scams
  • Seven Steps To Protect Yourself After Data Breach
  • Dynasty Trusts: The Gift That Just Keeps On Giving
  • Getting A High Tax Grade For Higher Education Credits
  • How Social Earnings Taxation Has Changed
  • Why Aren't More Millennials Moving On Up And Out?
  • Taking Socially Responsible Investing To The Next Level
  • Don't Be Caught Red-Handed By The Wash Sale Rule
  • Leading Economic Indicators Hit 10-Year High
  • Avoid These 6 Mistakes In Stretch IRA Planning
  • More Flexibility Allowed In Flex Spending Accounts
  • Individual Bonds-Ugh!
  • Set Aside The Funds One Might Need For A Rainy Day
  • Protect Against Possible Terrorist Attack
  • U.S. Leading Economic Indicators Rose Again
  • Fed Chair Strikes A More Cautious Tone, But Still Expects Moderate Growth
  • Count Off 3 Tax Breaks For Higher Education
  • Don't Be Victimized By These 10 Common Scams
  • Retirement Plan Choices For The Self-Employed
  • New Law Says Tax Debtors May Lose Their Passports
  • Compare Minor's Account To 529 Plan
  • Are You Being Socially Responsible?
  • 8 Smart Moves For College Grads
  • Seeking Financial Aid: Don't Fear The FAFSA
  • New Baby? Consider An Education Savings Plan
  • 3 Ways To Deduct Mortgage Interest
  • Understanding Deflation
  • Don't Play Up Super Bowl Outcome In Stock Decisions
  • When Should Millennials Start Retirement Saving?
  • Have Your Child Kick Into A Roth With A Reward To Boot
  • Sizing Up The Energy Boost To The Economy
  • A Stock Plunge Amid Strong Economic Data
  • 14 Top Year-End Tax Moves For Individuals In 2014
  • Drill Down For Three Key Oil And Gas Tax Breaks
  • When It Pays To ID Security Sales
  • GDP Growth Data Masks Strength Of The Recovery
  • Be On The Lookout For Crimes Involving An Elder Fraud
  • S&P 500's New All Time High Wednesday Will Probably Continue Over Upcoming Months, But Other Indexes Are Struggling
  • U.S. Stock valuations are within the top 10 valuations of all time but probably won't crash. Why?
  • Seven Steps To Digging Your Way Out Of Deep Debt
  • 5 Steps To Protect The Digital Assets You Own
  • The Long-Term Fiscal Status Of The United States
  • Margin Debt At Record Levels
  • What To Do When You're Suddenly Widowed
  • A Common Error In Powers Of Attorney
  • Should You Move To A Different State?
  • Tax Cost Of Being Your Own Landlord
  • Why Do GRATs Remain In Such High Demand?
  • Don't Wait To Harvest Your Losses
  • The Best States To Move To For Tax Purposes
  • 10 Reasons For The IRS To Flag Your Return
  • Many Women Face Special Challenges As Retirement Nears
  • Nine Reasons To Consolidate Debt
  • Straight Talk About Living Trusts
  • SEPPs From An IRA: Don't Change Horses Midstream
  • New Regulations Fill In Gaps On 3.8% Surtax
  • Do You Know Life Insurance Basics?
  • Top Income-Earners Drive U.S. Economic Growth
  • Give IRA Cash To Charity: Heads You Win, Tails You Win
  • Four Wash Sale Strategies To Help Clean Up Taxes
  • College Savings: How Much Do You Need Each Month?
  • Surprising New Research: Large Caps Top Small Caps
  • Newly Widowed Face 401(k), IRA Options
  • Retirement Saving Takes Time And Must Be A Priority
  • Divide-Conquer To Convert To Roth IRA
  • What Is Probate And What Does It Protect?
  • A Research Surprise On Bond Funds
  • After New Tax Law, Do You Still Need A Bypass Trust?
  • Start Estate Planning For Your Child Now
  • Seven Tax Ideas To Use Throughout The Year
  • A Comprehensive Way To Plan For College Savings
  • Bulletproofing Your Will Before Death
  • IRS Mercy on 60-Day IRA Rollover Error
  • Feds Warn Of Life Settlement Dangers
  • Know The Tax Rules On Charitable Gift Deductions
  • IRS Ruling Boosts IDTs as Estate Planning Technique
  • A Defined Benefit Plan Lets You Sock Away Large Amounts If You Can Overcome Some Obstacles
  • Economic Shifts Bring New Pitfalls And Prizes
  • Evaluating Great Companies
  • Inflation Versus Deflation
  • Jeremy Grantham And Lou Stanasolovich Discuss Market Valuations
  • Ramifications Of A Weakening Dollar
  • Secular Versus Cyclical Bear Markets
  • Small Business And Work Opportunity Tax Act
  • Time To Plan For Estates, Wills, & Trusts

  • ©2018 Legend Financial Advisors, Inc.®. All rights reserved.