In a piece on the new initiative by Japan's central bank to raise its inflation rate to 2.0 percent, the Washington Post told readers:

"The risks are known but impossible to quantify: of inflation remaining tame until it roars out of control, or of asset bubbles creeping into unexpected parts of the economy as investors take advantage of cheap money worldwide to make ever-riskier bets."

While central banks, like the bank of Japan and the Fed, have displayed an enormous lack of competence in recognizing and countering asset bubbles, there are no known instances of inflation remaining tame until it "roars out control," apart from countries victimized by war or natural disaster. This horror story seems to be entirely an invention of the Post (or its unnamed sources).

In all the standard models inflation is a process that builds up gradually over time once an economy is hitting capacity constraints. Economies do not just jump from being severely depressed to having soaring inflation. For this reason, serious people would view this prospect with roughly the same concern as an attack from outer space.

It is also worth noting that this piece places an excessive emphasis on deflation. Japan has occasionally seen modest deflation (a drop in annual prices of less than 1.0 percent annually) over the last two decades. There is no particular importance to having deflation as compared to an inflation rate that is too low.

The issue here is that it would be desirable to have a lower real interest rate given the weakness of Japan's economy. (The real interest rate is the nominal interest rate minus the inflation rate.) Since the nominal interest rate can never go below zero, the only way to lower the real interest rate is to push inflation higher.

For this reason, deflation is harmful, but only in the same sense that a lower inflation rate is harmful. A decline in the rate of inflation from 0.5 percent to -0.5 percent is no worse than a drop in the inflation rate from 1.5 percent to 0.5 percent. There is no magic about crossing the zero line. It is unfortunate that the Post and other news outlets have fostered so much confusion on this issue.

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