Biflation – What is it, definition and concept

In other words, this phenomenon shows price increases and decreases that occur at the same time. Of course, referring to the relative prices of certain assets and not to general price levels that are usually measured with indicators such as the consumer price index (CPI).

For example, housing (real assets) can see its value increase while, in turn, mortgages (debt assets) become cheaper. In this case, the country may not experience a generalized rise or fall in prices, but only in those two assets.

The biflation process and the Cantillon effect

The term was coined by Dr. F. Osborne Brown, an analyst at the Phoenix Investment Group. His goal was to define a situation in which two opposite effects seemed to occur. On the one hand, price increases and on the other, decreases in these.

This biflation is closely related to the Cantillon effect, which consists of the changes that occur in relative prices when the money supply increases or decreases. On the other hand, this effect is produced by the monetary policies of central banks.

Keep in mind that, technically, inflation or deflation refers to changes in general price levels. However, in this case the relative prices of certain assets vary, although the effect may appear, misleadingly, to be generalized.

biflation example

Finally, let us see an example of this phenomenon. Imagine a fictitious country in which the central bank decides to carry out an expansionary monetary policy by increasing the money supply. In that economy, two effects could occur.

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The first, related to its financial sector. Banks, having more money, decide to put it on the market by lending. Mortgage interest, when supply increases, falls to encourage borrowers. Housing prices, however, as demand increases, rise.

As we can see, in this fictitious example, a clear situation of biflation occurs. Real assets (homes) go up in value (inflation) and debt-based assets (mortgages) go down (deflation). Of course, continuing with the example, we will consider that the CPI has not changed.

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