Lack of inflation doesn't mean deflation is on the horizon
Recent reports on inflation -- or rather the lack thereof -- have further fueled speculation about the effects of "deflation" on the economy. Only a technocrat wishing to capture an enormously complex event in the smallest of vials could have formulated this term.
At the extreme, deflation represents a decline in the value of goods across all sectors on a nationwide basis for a sustained period of time. While massive deflation (price declines at rates that would cause production to cease) would be very disruptive to an economy, there is currently no evidence that anything near this situation is at hand -- or even in the foreseeable future.
Deflation can take several forms, some of which we have to cope with on a daily basis. Listed below are examples of each, as well as how we have coped with them to date:
Price-decline deflation. This is defined as a decline in the price of a "constant" good or service, i.e., one that does not change in terms of features, usefulness, or potential market. A simple example is clothing that sells at full price one day and is then marked down 20% the next day, assuming no drastic change in acceptable styles or weather. A piece of bread that sells at a discount because it is a day old, on the other hand, is considered a "changed" good.
In the trucking industry, a rate that is discounted with no change in service is an example of "pure" price-decline deflation. One purpose of such discounting is to attract new freight temporarily as traffic slows. Some other reasons for this form of deflation -- to open new markets or to meet changing competition, for example -- do not fit the price-decline model of deflation since the addressable market is changing and/or the product has changed. Taken to the extreme, a carrier could discount itself out of business. In fact, some have done just that. The result is expected to be temporary until the reckless discounters have left the playing field.
Changes in the value of a product that exceed any changes in price. We have seen this form of deflation on the equipment side of the business for several decades. Until the late 1980s, prices for Class 8 power units remained unchanged from earlier in the decade. Yet during this same time period, the quality of the product delivered and the economic value of the equipment improved dramatically.
In our industry, this phenomenon can be seen not only with equipment, but with transportation services provided by carriers and related support groups, such as logistics consultants. The ability to sustain this form of deflation will lead to economic growth.
Changes in the market for goods. This form of deflation is the primary argument for increased trade among nations. Opening up markets to all is one way to provide goods and services in a more cost-effective manner. The result can be similar, or possibly even improved, goods at lower cost to the consumer.
By freeing up that portion of disposable income that would otherwise have been spent on the restricted good or service, more goods and/or services can now be purchased. This, in turn, leads to economic growth for a broader group of market participants. Trucking deregulation was a prime example of this type of deflation.
If the types of deflation mentioned above appear to be beneficial to society, why would there be such a fuss about the potential for deflation? In part, this is because the impact on companies and employees can be catastrophic. If a company and its employees are unable to adjust quickly enough to downward pressure on prices and/or increased pressure to improve products, loss of business and jobs can result. The key is to remain vigilant and progressive in one's approach to markets.
If the market is flooded with goods or if demand is lured away by near-substitutes, the result could be margins that no longer support the continuation of the business. Urban retailers, for example, have had to revise their market strategies and adapt in order to survive. Not all did, and not all will. The same can be said for carriers.