What scenarios does deflation pose among consumers?

Inflation is almost always spoken of as an element of great perversion in the economy, and even of promoting monetary measures to combat it. Almost everyone understands it, more or less. But it is rarer to speak of the opposite movement, which is none other than deflation. First you will have to know what it consists of and how it can affect you in your daily life, including the relationship with the bank, or with the investment products. Well, it will have many more effects than you initially think, and some of them may even surprise you remarkably.

Deflation consists of a generalized and prolonged decline, of at least two semesters, in the price level of goods and services and that usually develops before a fall in demand. And that encourages a good part of the main economists to allude to its greater danger with respect to inflation. Not surprisingly, it entails tensions in the economy that in the long run can be more damaging for everyone, affecting economic growth, or even employment, as you can see in this article.

It is true that this economic scenario is more difficult to present than in inflationary movements, but it is unlikely that it will not appear. Sensibly affecting the economy of the countries that go through this situation. And to the point, that there will be investment products that are more beneficial than others, where they generate a greater return on savings. You may even need to change your investment strategy with this new economic situation. From this scenario, it will be possible to describe more clearly what will be the real scenario that you will find with the onset of deflation.

Deflation in Spain

One of the consequences that the current economic policy has generated, and as a treatment to combat the great economic crisis that Spain has undergone, has been the unexpected development of this economic state. And to which various analysts allude as an added problem that the Spanish economy currently has. And that if it remains in the next few months, it could have some serious consequences on the productive apparatus of the economy of our country. Not surprisingly, this is a very strong warning made by the main economic experts.

From this not overly encouraging scenario, it should be noted that the annual variation rate of the Consumer Price Index (CPI) for last February It was –0,8%, five tenths below that registered the previous month, after the latest data provided by the National Institute of Statistics (INE). And in which it is shown that the monthly variation of the general index has decreased in this period by 0,4%. As a consequence of these figures, it can be seen that deflation has reached the national economy. It is enough to see for how long, or if the opposite, it is a passing element.

Where the groups with the greatest influence on this decline are: transport, which decreased its rate by almost three points to –4,7% mainly due to the fact that this month the prices of fuels and lubricants have fallen while in February 2015 they rose. Food and non-alcoholic beverages, with a variation of 1,3%, eight tenths less than the previous month. Although the rise in the prices of fresh vegetables also stands out, lower than last year. On the other hand, it is worth mentioning the drop in the prices of fresh fish and fresh fruits, higher than those registered in the previous year.

As a result of these official data, you will have a first impact every time you go to the market, or to the supermarket to make the shopping cart. Not in vain, during these months of the beginning of the new year it will cost you less money to fill the car, especially with some foods and products. Surely you have already checked it in some of your visits to these shopping centers. The bill will not be as demanding as on other occasions, some of them not too far back in time.

Even affecting other areas in your relationships with consumption. Not only food, but also household appliances, digital devices, and even tourist services. In principle, you can benefit from more competitive prices than until a few months ago. And that will affect, with great certainty, that your bank account balance is healthier every month. Not in a spectacular way, but at least to reach the end of this period with fewer problems in your domestic economy.

Generates lower productivity

So far you have seen the most positive effects of this state on a country's economy. But they will not be kindness, far from it. Since, on the contrary, deflation causes unwanted situations for either party. When detecting better prices in the services and product, it is not surprising that the users themselves stop their consumption, thinking that these rates may continue to fall in the coming months. And they can even buy them with significant discounts in their prices, and below the current ones. And in this way the monetary flow falls, affecting all productive sectors.

And how can the withdrawal of the monetary flow affect you? Well, very simple, when this trend is transferred to companies, they show a drop in business activity that would be reflected in a larger drop in employmentAs a consequence of the companies' strategies to adjust their budgets, their production margins are reduced. And it can even be generated, as an additional effect, some salary adjustments. And that will cause your income to decrease as a result of deflationary movements in the country's economy.

Another aspect that may link you to this situation stems from your biggest problems to finance yourself (personal loans, for consumption, mortgages, etc.). Being the delinquency of bank clients another of the collateral effects of the implantation of deflation in the national economy. And they could even be harmed by raise interest on your lines of credit, having to make a greater financial effort to amortize the operation.

Problems for an orderly solution

The great drawback of deflationary processes is that require for their resolution of monetary measures that cannot be taken by the Spanish issuing bank, and that come from the European Central Bank (ECB). But of course, its mission is not to save the Spanish economy, but to look after the interests of all community partners. And currently very few countries are in this situation of monetary stagnation. With what finally its resolution will be much more complicated, or at least it would be delayed in its terms notably.

To the point that the national economy may be immersed in a deflationary scenario, which is boosted by lower economic growth, if the signs of a stop in growth on a global scale are confirmed, as warned by some highly prestigious financial analysts . Conforming, on the other hand, the worst possible scenario, and that in this case, it would represent a real danger for everyone, employers and workers, and with almost no exceptions.

Impact on investment

Of course, it is not a good situation for small and medium investors, as is probably your case, since it would be more difficult to resume the uptrend in the stock markets, and financial in general. As a consequence, you would have fewer opportunities to make your savings profitable, and with a lower representation of alternatives to achieve the objectives.

With respect to the main savings products (bank promissory notes, deposits or bonds, among others) the incidence would be lower. Without practically noticing it in terms of the return that you will generate every year when formalizing these banking products. With interest rates that would continue to remain below 1%, and in any case unsatisfactory for your claims as a saver.

With regard to investment funds, and unlike other economic trends, there are no ready-made models that contemplate deflation. And only its influence on some currencies can improve your wealth management.. From this point of view, the general fall in prices is not good news for taking positions in the equity markets. Not even in other alternatives, so your options would be significantly reduced.

Few are the strategies that you can use before the appearance of deflationary processes, and where the best thing you can do is protect your savings in a special way. Above the performance that you can obtain in this new economic scenario. And where a choice of securities with high yields through their dividends can be the best decision you can make, over other more aggressive ones.

Not in vain, and as a very specific strategy, as long as there will be the resource of diverting your savings to the financial markets of equities from nations unrelated to deflationary movements. Although to formalize these operations it will involve a greater monetary effort, as a consequence of the more expansive rates that the commissions applied by these stock exchanges have, almost double than in national operations.

In spite of everything, you will not have lost everything, far from it, since you will always have the resource of using some more sophisticated products for investment (exchange-traded funds, credit sales, warrants, etc.), which can make operations profitable in all possible scenarios, including of course the most unfavorable ones. And among them, how could it be less, in which deflation is present.