"Deflation v Inflation v Stagflation –
Misconceptions Clarified"
by Martin Armstrong
"Some people have a tough time understanding that we are in a massive deflationary spiral; they think that rising prices mean it is inflation and not deflation. Then they mistake stagflation for deflation and wonder why people are spending more on less. They only see prices, not disposable income, and, indeed, not economic growth or unemployment.
Prices rose sharply following the OPEC oil price hikes of the 1970s. Still, the sharp rise in energy prices crowded out other forms of spending, resulting in rising prices that had nothing to do with a speculative economic expansion, and a deflationary contraction they called STAGFLATION occurred, with rising prices and declining economic growth.
If you want to raise NET DISPOSABLE INCOME, lower taxes! Raising wages, as the Democratas believe corporations should do, will cause people to move to higher tax brackets, and soon, all benefits will come into play with these socialistic programs. As always, nobody in government talks about reducing government waste and corruption. The very people who are using these social programs are still paying taxes to the state and federal government.
Household income will soon be defined as everyone living in the same house – kids and all. Perhaps you will have to pitch a tent and make the kids sleep outside with the dog to avoid “household” income tax increases. Deflation is not the lowering of prices; it is the lowering of economic activity that can also include STAGFLATION, which occurs when prices rise but there is no economic growth.
Now, stagflation is not exactly the same as deflation, where the price of goods and services declines. For example, before World War II, the US experienced a massive deflationary environment in which GDP fell by 30% between the crash of 1929 and 1933. A quarter of Americans were unemployed. Imagine 1 in 4 eligible workers on the sidelines. Prices plummeted, and consumers were not spending because they had very little, if anything, to spend. Panics erupted, and people hoarded; the Second World War brought America out of that economic downfall. The public confidence wave began after World War II, because people believed their change in fortune was due to government policies (i.e., FDR’s New Deal) and war victory.
During periods of stagflation, the prices of goods and services increase while buying power decreases. Consumers end up spending more on less. As we are seeing now, for example, retail sales of items such as clothing have declined, but people are spending more on gas, shelter, and groceries. People feel as if they are earning less despite wage increases because their buying power has been drastically reduced. Companies will suffer as consumers spend less, and this has led to workforce reductions. Unemployment during the OPEC crisis of the 1970s was not nearly as severe, but it rose to 7.2% by 1980. Inflation went from around 1% in 1964 to 14% in 1980, and GDP growth went from 5.8% to -0.3% during that same period.
So be very careful. If you only look at prices rising and ignore the fact that your disposable income is declining, you will be in for a very rude awakening. Unemployment will continue to rise in 2026, with the computer anticipating figures surpassing 6%. The trend was set in motion long before automation and AI. Companies simply will not hire when they expect a continued contraction. The ability to borrow at a lower rate is not enticing because those same companies do not want to take on more debt than they already owe. We will not see another Great Depression by any means, but the “soft landing” is merely rhetoric intended to lift confidence.
November home sales in the US paint a picture of stagnation and a frozen market. Home prices and mortgages have risen and demand has waned. This is a buyer’s market but conditions are not particularly favorable due to the cost of ownership. Sales rose 0.5% from November to October and were 1% lower on an annual basis, according to data from the National Association of Realtors. A total of 4.13 million homes were sold for the month based on closings.
Supply remains constrained on a monthly basis, declining 5.9% from October, but have risen 7.5% on the yearly. A six-month supply is considered a balanced buyer-seller market, but current conditions show a 4.2-month supply.
The median home price in the US has reached $409,200, up 1.2% annually, and the highest reading on record for November. Lower-priced homes are not selling as those with less cannot afford to enter the market. Homes priced from $100,000 to $250,000 are down 8% from last year, but homes above $1 million rose 1.4%.
Gone are the days of overbidding cash offers. Homes are sitting on the market for an average of 36 days. Investors are slowly re-entering the market and accounted for 18% of sales compared to 13% one year prior. New homeowners accounted for 30% of sales, but historically, first-time home owners account for 40% of closings.
Weak regions are seeing declining values while stronger capital-inflow areas remain firm. This is classic late-cycle behavior. Real estate does not move as a monolith. It turns region by region, driven by employment, taxation, migration, and regulatory burden. The myth of a single “national housing market” is one of the great analytical failures of modern economics.
Transactions are falling and inventory is uneven. The real pressure will come not from housing itself, but from government debt, taxation, and declining economic confidence as we move toward the 2026 turning point. The model indicates that the current buyers market will persist into 2028. There will NOT be a housing bubble collapse as we saw in 2008. Commercial real estate is far more vulnerable than residential and operates on a different cycle. People have fled and are continuing to flee states that are unfavorable to capital, as we have seen with mega corporations fleeing places like New York and California. We will see fragmentation on a regional basis in real estate.
Interest rates will not collapse to save housing as capital demands higher yields and the central bank cannot toy with the markets as they have in recent years. Capital is migrating to states that offer financial stability, lower taxation and regulation. Transaction volume is declining and sellers are refusing lower prices. Buyers are waiting. Liquidity is vanishing. This is all par for the course during a collapse of confidence that will intensify in 2026."
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