I ran across this post regarding the increasing risk of deflation, and this chart caught my eye:
It is interesting to me how this shows clearly that as Quantitative Easing has winded down in 2014, the inflation that the Fed was manufacturing immediately died down. So that got me thinking, is deflation such a bad thing? Why has the government used such a historically drastic strategy to try to spark inflation and avoid deflation? On the surface, it would seem to me that deflation is a good thing for savers and workers ( wages typically do not keep up with inflation). If you have huge debts (like the government) deflation would be a bad thing as it makes your debt more expensive.
So I did some searching and found a couple good arguments on whether deflation is good or bad. First up, Paul Krugman had a good article on why he thinks deflation is bad. He gives three reasons why deflation is bad – I would encourage the reader to read the article and decide if the arguments make sense.
I also found this article covering how there is good deflation and bad deflation. The article makes some of the same points as the Krugman article, but covers some different scenarios.
In reading these articles, I guess I haven’t made up my mind if deflation is good or bad. Arguably in late 2008 and 2009 we were on the brink of bad deflation due to the high household debt and drop-off in economic activity. However now, it appears that the dropping oil prices and productivity improvements hint at ‘good deflation’.
I am going to keep mulling this whole issue over in my mind for awhile. Because looking at the above chart – good or bad – it looks like we are about to be hit with a dose of deflation.