When major retailers cut prices, it indicates consumers can no longer afford goods, leading to demand destruction. This squeezes corporate margins, forcing layoffs to control costs. The resulting job losses further reduce consumer spending, triggering a deflationary spiral across the economy.
Contrary to the Fed's theory of inflationary spirals, businesses cannot pass higher input costs to consumers. Customers are too financially strained. Instead, companies absorb the costs, which squeezes profit margins and forces deflationary actions like layoffs and reduced hours to survive.
The current economic hardship is a direct, long-lasting consequence of government COVID policies. Draconian lockdowns and subsequent money printing created massive supply disruptions that permanently raised the cost of everything, causing the severe financial pressure the middle class now faces.
Not all deflation is harmful. While innovation-driven price drops are positive, the current deflation is crisis-led, caused by widespread demand destruction as consumers run out of money. This signals a dangerously contracting economy, not progress or corporate generosity.
The massive price increases during the COVID pandemic were not a temporary spike. They represent a permanent "phase shift" to a higher cost of living. Slower inflation now means prices are rising less quickly from this new, elevated baseline, not returning to pre-pandemic levels.
The oil futures curve is split: short-term prices are up on supply fears, while long-term prices are down. This reveals that the market believes any immediate supply disruption will be overwhelmed by a severe, long-term collapse in global demand driven by economic weakness in the US and China.
Unlike the 1970s oil crisis, today's energy shocks cause demand destruction because consumers are weaker. In the 70s, people had decades of real wage growth. Today, after decades of wage stagnation, consumers have no financial cushion, forcing them to cut spending immediately when prices rise.
Declines in core inflation, particularly in services (excluding shelter and gas), are a major red flag that the Fed is missing. This indicates economic weakness is not just about lower energy prices but is a broad-based collapse in consumer demand for everyday services, signaling a much weaker economy.