Iceland the Best Example of Inflation Amidst Deflation

Over the past year or so, economists have been tying themselves into knots trying to figure out whether the U.S. economy is headed towards inflation or deflation. Our thesis is that the U.S. economy will see BOTH. Some assets/sectors will inflate while others like real estate/housing will deflate. (More on this to follow in our upcoming article)

As evidence look no further than Iceland - Bloomberg News recently carried an article titled Iceland Shrinks 8% as Prices Increase 11% in Deepest Recession , from which we quote below:

1. Economy shrinks, while prices rise: "Iceland’s economy will shrink 8.5 percent this year and consumer prices will climb 11.7 percent".
2. Stock market collapses: "The stock market has lost 97 percent of its value, and more than 780 companies have buckled under the weight of foreign currency loans as the krona plunged".
3. Currency collapses causing interest rates to skyrocket: "The krona’s official exchange rate has declined 53 percent against the dollar since Nov. 2, 2007. The central bank left its benchmark rate unchanged last month at 12 percent, the highest in Europe. Consumers refuse to borrow at Europe’s highest interest rates, and international banks reject requests for new financing".
4. High unemployment persists as industry crumbles: "Unemployment will rise to 8.6 percent this year, from less than 1 percent in December 2007, the IMF estimates.One of the hardest-hit industries has been construction, where 202 companies filed for bankruptcy in the 11 months after the crash, 67 percent more than in the same period a year earlier".
5. Even though demand has collapsed, inflation is high due to high cost of imports: "Companies are struggling as the krona’s decline and high interest rates wipe out consumer demand on the North Atlantic island, which imports about 70 percent of the products it uses, including raw materials such as lumber and oil. “People aren’t buying flat screens, they aren’t buying furniture, they aren’t traveling abroad or buying luxury goods,” said Bogi Thor Siguroddsson, owner of Johan Roenning hf, an importer and retailer, who says his sales volume has dropped 50 percent. “What is selling now is food, drugs and gasoline.” "
6. Car sales collapse, but prices soar: "Standing in Hekla’s showroom, marketing manager Brynjar Oskarsson is surrounded by new Volkswagens and Audis. There are no customers, and Oskarsson doesn’t expect any. People aren’t buying cars because prices have risen 66 percent in the past two years as the krona slumped in value, Oskarsson said. He estimates that just 2,100 vehicles will be sold this year in Iceland, down from a peak of 18,058 in 2005. Hekla has cut its staff to 160 workers from a high of 250".
7. The lucky few, who still have a job: "The only winners in Iceland’s collapse are companies paid in foreign currency. Along the waterfront, the smell of fish pervades the headquarters of HB Grandi hf, Iceland’s largest fishing company. Grandi hauls in 12 percent of the island’s annual catch, including cod, halibut and haddock, and exports all of its fish. The company hasn’t laid off any of its 650 workers and employees received a raise this year".