If you don't like inflation, you'll hate deflation
CBC
As Canadians celebrate this month's fall in food prices and politicians join the national sport of shaking their fists at grocery store owners, it might be time to listen to a gloomier prediction, if just to help prevent it from happening.
After a two-year bout of inflation — when price rises peaked at eight per cent, groceries climbed at more than 11 per cent, and the cost of housing left well-paid professionals feeling poor — it is natural to be nostalgic for the days when everything was cheap.
"People hate inflation. Hate it," said U.S. Federal Reserve chair Jerome Powell on Wednesday. "That causes people to say the economy's terrible."
Powell was announcing that the central bank would hold interest rates steady — contrary to the advice of some, including OECD chief economist Claire Lombardelli.
He insisted that a soft landing for the economy remains a primary goal for the Fed. And while getting inflation under control comes first, Powell repeatedly said a long and strong series of rate hikes has given the central bank the luxury of moving slowly to avoid breaking things.
But just as three years ago, when most analysts assumed inflation was unlikely or impossible, a new minority view is a warning about its evil twin: deflation.
Where economists differ from many of us is when we think that a general decline of prices is a good thing. Most economists say that while disinflation — the fall of inflation toward some reasonable level such as Powell's two per cent target — is an unmitigated good, an actual decline in prices across the board, deflation, is perilous for the economy.
You shouldn't ask for it.
There are several reasons, but essentially, while economists see a little bit of inflation as a lubricant to help in the necessary process of price adjustment, deflation is like putting sand in the gears.
The prospect of falling prices encourages consumers and businesses to put off purchases because they will be cheaper if they wait, sucking money out of circulation in the economy.
Bank of Canada deputy governor Sharon Kozicki said this week in her Regina speech, rising interest rates have a similar effect.
"Instead of purchasing something now, you could earn interest on your savings, make the purchase in the future and end up with some money left over," she said. But with deflation that reluctance to spend becomes even more widespread.
Falling prices also mean companies must cut costs including wages or go broke. While workers will put up with wage hikes slightly below inflation — as we have seen over the last few years — wage cuts stoke anger and are difficult to impose, often leading to contraction and mass layoffs.
According to Gary Tanashian, an analyst with a large following for his newsletter Notes From the Rabbit Hole, the current Goldilocks state of the North American economy — where things are not too hot and not too cold — is unlikely to last through 2024.
