What Is Biflation?

Biflation is the simultaneous existence of inflation and deflation in an economy. Biflation, while seemingly a paradox, typically occurs when rampant demand for commodity assets leads their prices to rise at the same time that debt-based assets fall out of favor and plummet in value.

Key Takeaways

  • Biflation is the simultaneous existence of inflation and deflation in an economy.
  • It tends to occur when monetary stimulus is applied to revive an economy.
  • Biflation has been exacerbated by rapidly industrializing countries consuming lots of commodities.

Understanding Biflation

Biflation, a relatively new term coined in 2003 by Dr. F. Osborne Brown, a senior financial analyst for the Phoenix Investment Group, generally kicks in when central banks open up the monetary spigots in a bid to stimulate a stagnated economy. Making lots of cheap money available via banks does not automatically mean that demand for everything will rise simultaneously. Instead, history shows that certain assets take favor over others, leading to inflation in some areas of the economy and deflation in others.

In a depressed economy, demand for raw materials used to make things such as energy, clothing, and food will likely remain relatively high because they are deemed essential purchases by consumers. People will often continue to buy them regardless of prices rises, leaving consumers with less money for discretionary expenses.

Leveraged assets like real estate are susceptible to experiencing price decreases in such an environment. When economic growth is stagnant and unemployment increases, people cannot always justify buying a home or anything else that is expensive and deemed to be non-essential, even if low interest rates, a key function of increasing the money supply, make it cheaper to borrow.

The upshot of a strong appetite for certain assets and weak demand for others is biflation. Suddenly prices are rising in one part of the economy and falling in another, paving the way for a mixture of inflation and deflation.

Example of Biflation

Unprecedented market events caused biflation to occur in the wake of the Great Recession of 2007–2009. Against a backdrop of high unemployment and a moribund housing sector, the Federal Reserve unleashed trillions of dollars in monetary stimulus to jump-start the economy, while pledging to keep interest rates low.

Those measures aided the economy, albeit not immediately across the board. Rather than targeting the funding toward infrastructure projects, for instance, much of the funding went back into speculative asset classes. Housing prices eventually recovered, but not nearly as quickly as liquid assets, such as stocks, which attracted investors due to a recovery in corporate earnings fueled by low interest rates.

The economy saw deflation in sectors such as housing, which fell in many regions until early 2012. Conversely, prices for gasoline rose from 2009 through 2012. The price of gold rose from 2009 through 2012, as well. Similarly, many other commodities markets saw rising prices over roughly the same period.

Special Considerations

Biflation has, in many ways, been exacerbated by globalization. In fact, following the great recession, many of the assets that experienced strong demand and inflation were those that trade globally.

For example, rampant appetite for energy and metals from rapidly industrializing countries, such as India and China, was largely responsible for boosting prices for many commodities in the years immediately following the Great Recession. This made essential raw materials more expensive in a period when many consumers in the Western world found themselves in dire straits financially, contributing to a dearth of demand for things bought on credit back home, such as homes and automobiles.