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?
Deflation is “bad” because it leads to an economic death spiral, and there’s no way to stop it.
Prices go down
People see prices going down and hold on to money thinking it’ll be cheaper if they wait.
Less purchasing despite lower prices cuts profit margins, so producers produce less.
Sellers lower prices more in a desperate attempt to make SOME money.
Repeat.
This usually leads to layoffs to try to salvage money, big sales to get rid of inventory, then eventually there’s nothing to buy, no one making it, and everyone loses their job.
Interest rates don’t fix it, taxes don’t fix it, you just cross your fingers and hold onto your butts
I’ve seen this reasoning so many times, and it’s flawed.
Sure, consumers might put off consuming non-essential items for a bit, thinking they’ll get a better deal later, but for the most part, humans aren’t mathematically optimized robots.
People need food, shelter and heat, and will pay to get it now. They also want stuff, so they will buy it. Being able to buy something they want 2% cheaper if they wait one year is just not going to happen.
Now deflation >10% is probably bad, but many act like it’s a huge problem if inflation temporarily drops slightly below 0.
Before and during covid, this made many central banks dropped policy rates below 0 because inflation was low. I would argue that this alone caused more problems just sitting still in the boat would. A few years later, it led to rampant inflation globally, as the central banks had essentially started printing money, thinking it would solve anything.
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u/StuartMcNight 9h 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?