Deflation In Action

Ottawa is relatively protected in this recession. At least so far. Yet the impact on the local economy seems not far different from that in other locations, ones that are actually seeing major impacts.

This is a reflection of psychology, or what economists often call consumer confidence. When you lose confidence in the economic outlook, even if there is no hint of coming disaster in your own future employment, you change your spending habits. That is happening in Ottawa, a town with a large public sector that is pretty well protected from serious cutbacks. It is hard to ignore the distress all around and continue on as if it's business as usual. Maybe you look at your mutual fund statements and wonder if you'll have the means to retire in comfort, as planned, in 2040. That's an awfully long way off, yet people still worry.

As I go about my daily rounds, shopping for this and that, which I tend to do at smaller establishments, I always like to ask the proprietors and sales staff how business is going. It isn't going well. Even in supposedly safe businesses like groceries (we all have to eat), hair stylists (hair doesn't stop growing) and even coffee shops (for the caffeine addicted), people are radically changing their habits. Yes, people eat, but they eat out less and are choosing more economical food items for the home. As my barber mentioned, hair grows, but rather than come in every 3 to 4 weeks for a trim, more men are figuring that once every two months is good enough. Or, why spend $3 on a premium coffee when you can get it for a tenth that price at home.

This ripples up the supply chain. My preferred (imported) coffee retailer told me to expect some significant price reductions next time I visit. His suppliers are feeling the pinch, which gives the retailers negotiating power over price. This of course ripples further back to the coffee producers. We see this on a larger scale over the entire commodities market, on which Canada's economy relies. Even Alberta is seeing a slowdown.

This is deflation in action. Economic planners fear this since it encourages more deferred spending. The thought-process is, since products will be cheaper tomorrow why buy today. This is the opposite of inflation which encourages spending today since it'll cost more tomorrow, especially where savings interest rates don't keep pace with inflation.

This isn't good. Until consumer confidence reverses the economy will not heal. This is one place where political leadership can help, by promoting confidence in the future. It isn't quite a rational strategy but is nevertheless one that can work. For each of us individually, if we are financially stable we ought not to cut back spending to any great degree. Just go on as before. That isn't easy to do when the media is broadcasting fear 24x7. Turn off the TV and spend like it's Christmas!