Practical analysis for investment professionals
21 January 2015

Deflation (And What to Do about It) in 13 Charts

Deflation is a thing now.

At least for the moment, it’s a statistical truth in some places — I’m looking at you, eurozone. But what does that mean? What’s causing it? And most importantly if you’re an investor, what the heck do you do about it?

Let’s find out. And be advised: if you’re not particularly concerned about deflation, you should probably get your head examined. Though you might have more fun checking out the other charts post I wrote recently.

The warning that I published in that article applies triply to these charts: They are just pretty pictures! If you read this and then use it to make investment decisions without verifying its content, you’ll literally wipe the smile right off of my face.

And as usual, if you dig this sort of stuff (and promise to think for yourself), you should subscribe to the Enterprising Investor.

In case you were wondering if it was just you (or really just me) who’s thinking about deflation, you’re incorrect. Google search volume for “deflation” is rising to levels not seen since 2009.

And the regional breakout is interesting too. Austrians rank second in concerns about deflation after Nigerians . . .

. . . but empirically are the least deflated members of the European Union. I noted last time that they were attracting a crazy share of immigration inside the eurozone, so it might be worth digging in a bit more. Anyone want to grab a drink in Vienna?

The picture of the aggregate doesn’t look good at all though.

And the growth in negative-yielding government debt is clearly alarming, though it’s important to remember that a negative stated yield and an investor return are not the same thing. In a deflationary environment, money gets more valuable. Getting €.99 back in a year on your investment of €1.00 might be a pretty good deal if those €.99 can buy a whole lot of stuff all of a sudden.

Let’s zoom out a bit and think about what deflation really is. I find this 800-year chart of the Swedish consumer price index (CPI) oddly comforting when I remember that humans actually managed to live through the multicentury period of pronounced inflation and deflation that is pictured here. That said, it does highlight that we live in an unusual era of monetary peace. The article that this tweet links to also includes a great chart relating the US CPI to stock performance (spoiler: no relation) as well as the excellent observation that while the world was on the gold standard, deflation had to follow inflation: you couldn’t change the monetary base at will!

Still, it does look like we Americans may be joining our colleagues in Europe sooner than we’d like. A whole host of US economic data has disappointed.

And this time series of the CPI doesn’t look cheery, although it’s worth noting that it managed to correct back in 2011, and the Europeans are talking about a “big” round of quantitative easing (QE).

That’s not the only thing we need to think about though. The US dollar has rallied massively and oil is getting crushed. Are we really surprised by an environment where individuals are paying less for things?

It is also somewhat typical for us to go through a period when initially rosy estimates are rolled back. We literally do it every year, since forecasts are really just a way of having a conversation about expectations and it’s natural to be optimistic.

There has definitely been an impact on the earnings guidance that firms have been issuing though. It’s possible that this is reflective of investor relations teams’ tendency to seek lower expectations that are easier to exceed, but the zero line in this time series is clearly related to recessions.

Just like this one.

So what do you do? It depends, but it’s worth remembering that things still have a tendency to grow over long time horizons, despite disastrous events and unbelievable volatility.

Some changes are massive and irreversible though, like last week’s “cliff” in the Swiss franc. In the game between Markets and the Swiss National Bank (SNB), my colleague Ron Rimkus, CFA, puts the score at 1–0 markets.

The trick for enterprising investors will be to stay focused on what’s really important. In life, that means being a positive influence on yourself and those around you. In investing (whether the outlay is your dollars or your time), that means focusing on what you’ll get back later from what you part with, and what you’ll be able to do with that. In a deflationary environment, money increases in value automatically, which stalls investment and defers consumption.

What’s the best trade you can put on in your personal account to ensure your financial success in such an environment? Make sure you’re making a profit on your life. It looks like money will only get more valuable.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©

About the Author(s)
Sloane Ortel

Sloane Ortel is the founder of Invest Vegan, an ethics-first registered investment adviser that manages distinctive discretionary portfolios of public equities on behalf of aligned individuals and institutions. Before establishing her own firm, she joined CFA Institute’s staff as a sophomore at Fordham University and spent close to a decade helping members adapt to a changing investment landscape as a collaborator, curator, and commentator. She is also a co-host of Free Money, a podcast for sustainability-oriented investors with a sense of humor.

8 thoughts on “Deflation (And What to Do about It) in 13 Charts”

  1. Will,

    I love this innovative format of three touches on a single topic: your comments, original posts, and supporting visuals! Thank you, Michael

    1. Michael —

      Super glad you like it! Many thanks for reading, and hope the new year is shaping up well.

      All best —


  2. ed says:

    can you explain why someone would buy a bond with negative return rather than just leave the money in a bank or under a mattress. that is the piece of “deflation” that I just don’t understand.

    1. Ed —

      Sure, I can take a stab at it! I will of course offer the following up with the caveat that I don’t really consider myself an expert on monetary policy (and that’s what we’re talking about) so this is perhaps best taken with a grain of salt. I’d also love if others chimed in and clarified this explanation.

      My short answer is “because leaving money in your mattress is annoying and expensive.”

      So like, what do I mean by that? Well, think about it this way: it’s probably feasible to locate $10,000 in bills and put them under your mattress. If you were to use $100 bills, you’d be able to store about as much as $900 Million before you are taking up much more space than a car (at least according to this analysis, which uses a $1 bill instead of $100).

      So far this sounds great, but we need to wonder whether this is really feasible for many of the modern uses of money. It might be a decent path for a private investor who is primarily interested in preserving the value of their capital, but for those whose assets serve strategic purposes it can be limiting. Just think about how hard it would be mechanically for multinational corporations to transact in cash. For Google and Fidelity to invest $1 Billion in Spacex, would they have shipped over a physical pallet of cash? How much would it cost to secure and transport that? Also, what about the (material) probability that some of it goes missing?

      This excellent post makes the point that 1000 CHF notes are pretty much the perfect vehicle to do this with, but further makes a number of very interesting points, not least that central banks will not like you very much if you hoard paper currency and very well might take action to make your life unpleasant, especially at scale. Miles Kimball has written lots of smart stuff on this that is not easy to compress. However, a question worth considering (that will, I hope, get you to read Miles’ stuff) is “what does the hoarding process look like as governments move away from paper money?”

      Anyway, I hope this is a helpful beginning. I will continue to turn this over and hopefully pull more organized thoughts together into another post.

      All best!


  3. ed says:


    Thank you for taking the time to help me understand deflation better.
    You make the point that holding large amounts of cash quickly becomes impractical and I can see what you mean. But still, why not just deposit the cash in a bank, maybe at essentially zero interest rather than buying bonds that pay negative interest.
    As you can probably tell, I’m no expert on this topic and am just trying to get my head around why anyone would voluntarily commit money to a losing investment rather than keep that money somehow on the sidelines.

    1. Ed —

      No worries! It’s my job. The whole point of the Enterprising Investor is to help folks understand issues like this better :). I love thoughtful questions like yours, as it not only points out issues in my own explanation (sorry!) but gives me a chance to see what sort of issues I can hit in future posts.

      I think I will need to treat this in a forthcoming post, as I want to take some time and do it authoritatively. For the meantime, I’d say that I doubt central banks would allow a zero interest rate on bank deposits in a world of persistent negative interest rates in other asset classes. I’m not sure the mechanic through which they would apply a haircut to a bank deposit, but I imagine they would need some way to address the capital hoarding (and subsequent lack of investment) that would result from allowing bank deposits to yield a nominal 0%. I would bet that they would take action aimed at forcing the yield towards real 0%.

      I apologize if that’s still unclear! Stick around though — hopefully I can do a better job in the next few days to come after conferring with colleagues.

      All best —


  4. Prafulla says:

    negative yielding bonds means it will yield negative return if you hold it to maturity . The point to be noted is will you hold it to maturity ? Most of such bonds are traded and plus don’t forget yields are present value estimate of possible interest rate path. Will the economy continue to stay in recession for 20 years and deflation exists and you will hold the bond to maturity then you will make negative returns . That’s too many things going the same or ” pessimistic ” way

    1. Hi Prafulla —

      Thanks for reading! As you note, the tradability of these instruments means that one may be able to realize a positive return even if the yield to maturity is negative. I agree it’s unlikely we have a 20 year period of persistent deflation, which just serves to underscore how speculative it is to purchase bonds below the zero bound.

      That said, it would be possible to have a positive real return and a negative nominal return if that 20 year period were to materialize (not that it’s likely to).

      All best!


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