Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?
As far as I'm aware it's more about investment perspectives, why would you invest money if you could keep it in bank instead (this money will gain on purchase power anyway).
Less investments = lower volume of money circulating in economy and less potential jobs = slower economic growth/danger of recession
It hits all parts of the economy. People don't want to spend or are afraid of spending so shops have to drop prices to lure customers in. This leads to tighter margins, then less room to hire and pay wages.
That's just not what happens. There's no evidence that deflation reduces consumers' propensity to spend (probably because decreases in the price of consumer goods increase consumers' real incomes, offsetting the effect). Nor is there evidence that inflation increases consumers' propensity to spend (this is likely because increases in the price of consumer goods reduce consumers' real incomes, offsetting the effect)
That's not what happens. If people were willing and able to defer consumption to when things got cheaper, nobody would have bought any electronics for the last 70 years and nobody would ever have high interest consumer debt
It's a myth that deflation causes material drops in consumer spending. The inverse is what's true: drops in consumer spending cause deflation, as producers are forced to lower prices to move inventory that people stopped buying
Not all goods are created equal, especially larger purchases.
I agree that consumer spending causes deflation. All my examples have been from the consumer's point of view. But it can also be cyclical. Pressure on companies can put pressure on employees who are also consumers.
True that not all goods are crated equal. Larger purchases (also durable and inventoriable goods) are the best candidates for temporal substitution, and they're also the most sensitive to interest rates.
Which is to say that most other goods and services are very insensitive to temporal substitution, which makes hand-wringing about deflation caused by price drops of those goods misguided at best
To say nothing of the fact that falling demand can only be economically problematic as it pertains to domestically-produced and consumed goods. There are zero negative effects of falling import prices (and if there were, tariffs would solve them). And falling domestic prices of export goods are simply irrelevant, by definition - actually deflation tends to be excellent for exporters because their costs tend to go down while their revenues are unaffected.
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u/StuartMcNight 8h ago
Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?