A Look at Deflation

By Jeremy Anwyl August 24, 2010

Auto Observer contributor Dale Buss has posted an interesting piece on deflation. (Read it here.)

Economists might debate whether the economy at large is in for a bout, but in some sectors it is already here.

Clearly, not all deflation is equal.  Take price deflation in consumer electronics, where it seems quite benign--even beneficial.  Consumers get more and more for less and less.  The relentless pace of innovation creates a built in obsolescence that guarantees trading in old for new.  (Interesting that consumer electronics is one area where spending is still comparatively strong.  Even in tough economies there is demand for inexpensive indulgences.)

In autos, deflationary data is obscured by the increasing number of features being offered as standard on even entry level vehicles.  Remember when an airbag was $800?  Or when ABS was introduced as a high end option?

From that perspective, consumers have been benefiting from vehicle price deflation for some time.  Even when transaction prices are headed up, it is for vehicles that are better equipped.

But unlike electronics, vehicles represent a major financial commitment.  In fact, it may be because vehicles are so much better today that consumers seem quite happy driving them long past what might have been their "trade by" date in years past.

And of course, this absence of demand contributes to today's weakness in transaction prices.

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