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Can someone please school me on why that would be bad?
It's actually nuanced, deflation CAN be bad, but most people seem to interpret that as ALL deflation is bad.
Remember that "declines" in this context just means that prices are going up slightly slower than they were before. It doesn't mean anything's getting any cheaper.
two tenths of a percent decline is barely a remarkable, let alone laudable achievement. This might be a sobering sentiment but US inflation is still out of control. ideal inflation is 2% and policy handbrakes like increases in the prime rate are too little too late as we should have sought percentage point increases a year ago as opposed to the fractional increments we saw last november. Arguably the half-percent mod…
Anyway, these numbers are appropriately 4 to 5% closer to the target than expected assuming they can be calculated this precisely it’s a meaningful difference.
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If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future). When everyone slows spending at once, it can lead to severe a recession or depression.
Perhaps for businesses this may be true. It's hard to imagine for a consumer. I'm not going to delay the purchase of groceries, a fridge, a new roof or (if I'm feeling rich) a new car just because they may be 3% cheaper next year. I'm not saying this conventional wisdom is wrong, but it's not obviously right.
Groceries, sure, but then as a consumer you are still impacted because suppliers are less likely to provide the goods you want.
Deflation is really bad. One of the consequences of the gold standard was the big swings (inflationary after a big gold strike, like California' Yukon, or Victoria; deflationary when the gold supply could not keep up with economic activity) that you can easily see in the second half of the 19th century.
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Yes, if things were actually getting cheaper that would be "deflation" and it would probably be bad.
Not right after a steep inflationary period like we're living. Some deflation would actually be a concrete sign of things going back to normal. Slightly lower inflation as we see will do little to help families for the next few months or years, and it is clearly inflationary.
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Inflation is not interest rates, it’s perfectly normal and proper to have higher interest rates than inflation. They’re only linked due to rehypothecation of money supply which is a problem in an of itself. But it gets a little complex to explain. Edit: my brain skipped over the ‘cash’ part and assumed ‘risk free’ interest would still be collected.
Can you explain why you think this disputes my point? The real interest rate is the nominal interest rate minus inflation. When there is inflation, the real interest rate for holding cash is negative. When there is no inflation, that real interest rate is 0%. The disincentive to holding cash disappears and therefore more people hold cash.
Yes.
> When there is inflation, the real interest rate for holding cash is negative.
No. This assumes nominal interest rate stays constant which it very much will not do.
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0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of in savings accounts, CDs, bonds, and the like is bad for the economy. That is why economists generally prefer a small positive rate of inflation. It adds more incentive to both spend and invest.
>0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of This is an absurd claim. Nobody seriously considering mattress vs CD (or bonds in a low rate environment like we had 2008-2020) is swayed by a return of less than a couple percent. It is a security vs liquidity vs trust calculation, not a return based one. Furthermore, as the other comment…
It isn't the most up-to-date data and survey results are always a little questionable, but here is some data from 2015[1]:
>A new survey of more than 1,800 people from the American Express Spending and Savings Tracker, however, found that 43% of Americans keep their savings in cash. An alarming 53% of those cash-hoarders "plan to hide bills in a secret location at home."
Those numbers are big enough that even if they are way off, there is still a sizable number of people who are holding onto their savings in physical cash. That would go up if there was no inflation.
[1] - https://www.businessinsider.com/americans-hide-money-under-t...
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Yes, if things were actually getting cheaper that would be "deflation" and it would probably be bad.
Can someone please school me on why that would be bad?
Beyond that it's an issue for investors. Interest rates have a nominal lower bound at 0% (because you can always just hold money instead of lending it) so the minimum real interest rate becomes effectively the rate of deflation. So imagine that deflation is 4% and I have a use of capital with a real rate of return of 3%. It won't get funded because investors can achieve a higher real return (4%) by just sitting on capital instead of investing it.
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If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future). When everyone slows spending at once, it can lead to severe a recession or depression.
I'm not sure I buy (heh) into this. I usually buy things because I need them, or want them in the moment. I'm not gonna postpone buying a washing machine because it might be cheaper next month. I'm not gonna pass on getting wasted because drinks are cheaper next month. I'm not gonna starve myself because food might be cheaper next week.
There’s a reason n=1 samples aren't usually the basis for general descriptions of behavioral trends.
Remember that "declines" in this context just means that prices are going up slightly slower than they were before. It doesn't mean anything's getting any cheaper.
> It doesn't mean anything's getting any cheaper. This is true for the overall price level, but some things did get cheaper: energy (MoM) and used vehicles (MoM and YoY). Minor nit, granted.
Earlier this year we were getting offers from dealerships (so, they'd still expect a profit margin on top) to buy a car that was used when we bought it, and that we've driven for a further three years, for like 10% more than we paid for it back when it had way fewer miles and a few less years on it. I've never seen a car appreciate, even in unadjusted dollars, before.
once the SPR cannot be drained to manipulate gasoline costs, things will get interesting.