1. The fundamentals
Chapter 1 of 6 · 3 min
Deflation and inflation are two opposing macroeconomic states with different effects on companies, liabilities and investments.
10x Insight
Japan has lived with deflation since 1995 and GDP per capita is essentially unchanged since then — a cautionary example.
Inflation is a general increase in the price level and is measured in Sweden by the CPI (consumer price index) and CPIF (CPI with fixed interest rate). Moderate inflation (2 percent) is considered healthy because it gives the central bank room to cut the real interest rate in crises and avoids deflation risk.
High inflation (5+ percent) erodes purchasing power and creates uncertainty, while hyperinflation (50+ percent per month) destroys economic relationships.
Deflation is the opposite — falling prices. In theory, deflation can be positive if it stems from productivity gains (as in consumer electronics), but in practice it is mostly destructive because it triggers the Fisher debt-deflation spiral.
Households and companies with liabilities find it harder to pay back, which leads to waves of bankruptcy and falling asset prices.
Japan has lived with deflation since 1995 and GDP per capita is essentially unchanged since then — a cautionary example. Sweden last had deflation in 2014–2015 (CPIF −0,1 percent) during the Riksbank's failed inflation hunt, and immediately got problems with rising real debt and falling housing prices.
The difference between inflation and deflation for investors is fundamental. Under inflation, nominal profits, property prices and wages rise — stocks and property act as a hedge. Under deflation, nominal profits fall but real liabilities rise, which hits indebted companies and property.
For Swedish investors