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Home Publications Blogs Beat the Press Nonsense on Deflation: Prices Are Falling in the Euro Zone

Nonsense on Deflation: Prices Are Falling in the Euro Zone

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Sunday, 13 April 2014 07:11

Expressing concern over deflation (i.e. the inflation rate turning negative) is the way in which people tell you that they have no clue about economics and just repeat what they heard others say. The inflation indexes we use are an aggregation of millions of different price changes. There is a substantial amount of dispersion around the overall inflation number. This means that when the inflation rate is near zero, there are many goods and services whose prices are already falling.

This means that the WSJ discussion of the risks of deflation in the euro zone is rather silly. It tells readers:

"Mr. Draghi said Saturday that he sees no evidence of a broad-based decline in consumer prices, known as deflation, and that there is no sign people are delaying spending in hopes that prices will fall."

With the euro zone inflation rate at 0.5 percent there are undoubtedly large numbers of goods and services for which prices are declining now. (People may not recognize these price declines since the inflation data use quality adjusted prices. This means that if the price of a computer increases by 5 percent, but its measured rate of quality improvement is 10 percent, then the government statistics will show a 5 percent decline in prices.) If the rate of inflation were to turn negative and become deflation, it simply means that the percentage of items with falling prices has increased.

While a lower inflation rate is worse than a higher inflation rate in the context of a badly depressed economy (it raises real interest rates and makes wage and price adjustments more difficult), there is no consequence to crossing zero. People who understand economics know that deflation doesn't matter. People who whine about deflation are trying to tell you they don't understand economics.

 

 

Comments (3)Add Comment
Ban Productive Computers Against Austerity
written by Last Mover, April 13, 2014 8:58
This means that if the price of a computer increases by 5 percent, but its measured rate of quality improvement is 10 percent, then the government statistics will show a 5 percent decline in prices.)


It's bad enough the inflationastas and deflationastas can't even keep their story straight on which direction supports the economic doom they keep preaching.

But when they start undermining their argument as well that more productive computers are a bad thing in the same context that austerity and more productivity is a good thing, well now, that is crackpot crazy economics if it ever was.
I think its 80,000, not millions....
written by pete, April 13, 2014 7:22
http://www.bls.gov/cpi/cpifaq.htm#Question_1

Anyway, if the average is +.5, its + .5. What is the point of this post? If the average was 2%, some could be 4%, some 0%? I think the underlying, unstated point is Sir Paul Krugman (still) wants 4% or more inflation. The only time we did that was quite unsuccessfully in the 70s. What a joyous time that was. Can you spell WIN (whip inflation now). Essentially, Krugman's argument is that with higher inflation, say 4% for consumer prices, i.e., output prices, rise faster than wages, so voila, companies make profits, hire more workers with 0% wage growth due to massive unemployment, lowereing the unemployment rate. It is a great idea, though it is of course somewhat fraudulent, hence the AFL-CIO (originally) knew it was a bad idea (as did Marx long ago). Oh well, times change. Bring it on! Then income equality will for sure get better ;)

...
written by Matt, April 14, 2014 7:29
@pete:
If the average was 2%, some could be 4%, some 0%


That's pretty much exactly the point, since here in the reality-based economy people and companies don't produce a generalized basket of goods, they produce individual goods.

You may also want to consider freebasing slightly smaller quantities of conservative media in the future - there's a real difference between 4% inflation and 10%+ as seen in the 1970s.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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