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Deflation

Which is worse: inflation or deflation?

Given the choice, most economists would take their chances with inflation. Before getting into why, two quick definitions: “inflation” is a decrease in the value of money, which leads to rising prices; “deflation” is just the opposite: a period of falling prices.

Inflation can cause problems, to be sure. Even modest inflation shrinks the buying power of your paycheck and your savings, and severe price increases make it hard for businesses to plan. But mild inflation encourages immediate spending and investment, helping the economy to grow.

Deflation, on the other hand, can initiate a vicious cycle that winds up hobbling the economy. You put off spending because you figure you’ll get more for your money if you wait, and the drop in demand forces companies to lower prices even further. Meanwhile, companies expecting to get lower prices for their wares cut production and lay off workers — depressing wages and pushing down demand even more. Such a deflationary spiral was a major contributor to the Great Depression.

Editor's Pick

  • Deflation: Should We Worry?

    An extended drop in the price of goods and services is called deflation. It often happens during a recession, and it can hurt the economy further. MoneyWatch.com's Jill Schlesinger explains.

  • The Deflation Warning Signs

    Why some economists consider deflation the greatest risk to the economy today.

  • Falling Prices, Rising Fears

    The threat of deflation has intensified, not just in the U.S. but overseas as well. In this increasingly interconnected world, the effects of the economic slowdown can be felt everywhere from Seoul to Sao Paulo.

  • Worldwide Dread

    In the wake of last year’s collapse in oil prices, deflation has become a global concern.

  • How Deflation Hits Home

    You might think lower prices are nothing but good news. But deflation can change the way you spend and earn money — and not for the better.

  • Investors Beware

    Deflation can be toxic to your portfolio too. Here’s why falling prices can drag down stock prices — and why the government may be unable to help much.

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  • A Funny Thing Happened to the Rally in Treasury Bonds

    Hugh Johnson, a well respected Wall Street veteran, once recited what he called the Analyst's Credo: "If you get it right, try not to laugh." An April 6 column has proven a source of amusement. It questioned whether it was possible to be too safe and suggested, with the help of some analysts...

    Blog posts | Jun 18, 2009

  • Economic Smack-Down: Inflation vs. Deflation

    In today's "Reality Check," MoneyWatch Editor-in-Chief Eric Schurenberg and I discussed the economic smack-down of the moment: inflation vs. deflation. Although most economists understand that a recession, especially one highlighted by significant deleveraging, is deflationary, the worry...

    Blog posts | Nov 24, 2009

  • Inflation vs. Deflation: Should You Worry?

    Some predict the economy is gearing up for inflation. Others say deflation is more likely. Who is right? And how can you prepare?

    Videos | Nov 24, 2009

  • No COLA For You: Seniors Discover the Downside of Deflation

    Social Security recipients and federal pensioners today discovered the downside of ultra-low inflation: Their COLA completely lost its fizz. For the first time since those groups began getting annual cost-of-living adjustments (COLA) in 1975, the Social Security Administration and the U. S....

    Blog posts | Oct 15, 2009

  • Earnings Watch: Big Banks You Own

    On tap this week: Earnings reports from four big financial institutions, including two that taxpayers own big stakes in. MoneyWatch's Jill Schlesinger tells us which numbers to watch.

    Videos | Oct 12, 2009

  • The Fed Fears Deflation More Than Inflation

    In his interesting post, Scott Sumner argues that deflation is more likely than inflation, and that if it occurred, it would damage the economy by effectively raising labor costs to firms, forcing them to lay off more people and worsening our unemployment problems. In contrast, I view deflation...

    Blog posts | Jun 29, 2009

  • The Fed's Monetary Policy Has Veered Off Course

    Although the risk of deflation has receded in recent months, Fed policy is still too contractionary for the needs of the economy, as the money supply has not kept up with increases in money demand. Two percent inflation is the goal Both Lee Ohanian and I have published papers arguing that,...

    Blog posts | Jun 30, 2009

  • Deflation: Should We Worry?

    An extended drop in the price of goods and services is called "deflation." It often happens during a recession, and it can hurt the economy further. MoneyWatch.com's Jill Schlesinger explains.

    Videos | Jul 8, 2009

  • Deflation is Our Biggest Worry -- Not Inflation

    Many economists are worried about high inflation over the next few years. This is based on a misdiagnosis of the current economic crisis. Although the recession officially began in December 2007, until last August the damage was mostly confined to housing and finance. In August 2008, the...

    Blog posts | Jun 26, 2009

  • Fed Marks End of Deflation Fears

    The Federal Reserve is signaling that deflation, one of the great economic fears of the last year, is no longer a threat. That seems to indicate the Fed now feels confident that we won't have another depression along the lines of the downturn in the 1930s. You'd have to look hard for the Fed's...

    Blog posts | Jun 25, 2009

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