How Much Should We Fear Deflation?

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Deflation isn’t always accompanied by Depression-style soup lines.

“Deflationary spirals” have been a major subject on the economics agenda since the financial crisis hit. While the theory here is clear — falling prices lead consumers and businesses to hoard cash — there are few actual examples of deflation to study. The Great Depression in the United States is one, and the current long period of slow deflation in Japan is another.

In a surprising article, Bloomberg’s Toru Fujioka reports on the response of Japanese consumers and businesses to deflation, finding a startling face: many of them like it. The elderly benefit from savings and pensions that go further. And while deflation may harm the young by keeping wages stagnant in the long term, it’s also the only de facto wage increase they’ll see with businesses unwilling to raise salaries. Economist Tyler Cowen notes that though the Japanese economy has been stagnant, the unemployment rate is still 4.1 percent, a number that other countries must find enviable.

Over the past decade, Japan has seen the consumer price index for most periods hover just below the zero-percent inflation line (chart’s above). The notable exceptions were in 2008, when inflation rose as high as 2 percent, and late 2009, when prices fell at close to a 2 percent rate. The rise in inflation coincided a crash in capital spending. The worst period of deflation preceded an upturn.

This isn’t enough data to infer causal effects. It does seem, though, that the relationship between growth and Japan’s mild deflation may be more complicated than the Great Depression-inspired deflationary spiral narrative suggests.


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