Let’s Hope Deflation Is Headed Our Way
The yearly growth rate of the US consumer price index (CPI) fell to 0.4 percent in April from 2 percent in April last year while the annual growth of the producer price index (PPI) plunged to –1.2 percent last month against 2.4 percent in April 2019.
Furthermore, the yearly growth rate of the import price index fell to –6.8 percent in April from –0.2 percent in April last year.
A general decline in the prices of goods and services is regarded as bad news since it is associated with major economic slumps such as the Great Depression of the 1930s.
In July 1932, during the Great Depression, the yearly growth rate of industrial production stood at –31 percent whilst the yearly growth rate of the CPI bottomed out at –10.7 percent in September 1932.
According to commentators for the US central bank—the Fed—the possibility of deflation is a major worry. That is because when prices fall it is harder for borrowers to pay down existing debts, leading to rising defaults, while banks become reluctant to extend credit. The logic runs that these two factors combine to generate a downward spiral in credit creation and resultant economic activity. Furthermore, most experts regard a general fall in prices as always “bad news,” for it slows down people’s propensity to spend, which in turn undermines investment in plants and machinery. These factors are further argued to set in motion an economic slump. Moreover, as the slump further depresses the prices of goods, the pace of economic decline intensifies.
It is for these reasons that most economists are of the view that it is the duty of the central bank, the Fed in the US, to prevent deflation. In his 2002 speech before the National Economists Club in Washington, DC, entitled “Deflation – Making Sure ‘It’ Doesn’t Happen Here,” Ben Bernanke, then a Fed governor, laid out measures that the central bank could use to combat deflation—such as buying longer-maturity Treasury debt. He also mentioned Milton Friedman’s “helicopter money.”
For most experts the key reason for the need to p
Article from Mises Wire