Why Are a Couple Sectors of the Economy Facing Steep Inflation During a Deflationary Era

Our economy has been in a prolonged period of moderate or low inflation that has lasted almost a decade. This past year has seen such low inflation that for the first time there will not be an automatic Cost of Living Allowance (COLA) for Social Security. However, at the same time we hear our congressional leaders saying action must be taken immediately on health care reform because of the escalating costs. Why is the cost of health care increasing during a deflationary time? Here is a video that attempts to explain how the lack of free market capitalism has lead to the spiraling costs.



You really ought to watch the video. However, if you didn't watch the video, the biggest point was they used the example of a couple health care treatments that are not covered by insurance to show how free market competition can lead to lower costs. Lasik eye surgery used to be very expensive when the technology was first developed. However, in order to be a successful business model, doctors had to reduce the cost enough to make it viable for more people. Now Lasik eye correction is actually relatively inexpensive considering how much we value our sense of sight.

What's the other sector with double digit inflation during this deflationary period? I bet most of you have already guessed that post-secondary education is the answer. What do those two sectors (health care & college education) have in common? Oh yeah, the majority of end users are not paying. If everyone had to pay for college (not decades later, but now) the cost would stop increasing as colleges would have to compete for students.

It is Economics 101. Competition drives down price.