Stickiness of nominal wages means thaf deflation leads to more rapid downsizing in industries facing slowdowns (including transitoy ones), which is among the reasons that the Fed, faced with a dual mandate of price stability and promoting full employment, prefers small positive inflation. There's also reason to believe that deflation is more likely to be sticky once entrenched than inflation, because the knock-on effects produce more deflation.

> For those on a fixed income, this is money we lost forever.

Yes, that's a fundamental problem with fixed incomes and why minimum support programs don't tend to use fixed nominal benefits across time. Most people aren’t on fixed incomes, and if we tried to manage price levels around people on fixed incomes, not only would it be bad for everyone else, but it would also threaten the investments underlying the sources of those fixed incomes (which aren’t really fixed, because they can drop, including to 0.)

Governments are afraid of deflation (prices going down) because consumers can go into a holding pattern (stopping spending while waiting for prices to continue to decrease) which can cause the economy to stall out.

Is there any evidence that modest deflation actually causes this "holding pattern" in the overall economy? I see this theory stated a lot for the reason that deflation is bad, and it definitely checks out on a basic logical level. But economics is complex right? So I'm curious what the evidence is in the real world.

I can imagine this happening with large deflation (10%, say), but what about 2% or 1%? It's not obvious to me that people would not buy a TV they really wanted if they knew it would be $392 instead of $400 next year. If consumers actually acted this sensitively toward a drop in prices, then wouldn't nearly all consumers wait for sales for all purchases? But we know that is not the case. Hell, if consumers were this sensitive toward their finances, they certainly wouldn't pay lots of interest on avoidable credit card debt, right?

It's more the bigger investments that drive a lot of the economy that are the concern - think real estate and stocks. Why buy a $1 million home today if you'll be able to buy it from $980k next year, and maybe $965k the year after that? More importantly, why continue paying the mortgage on your million dollar home when it's likely never to be worth a million again? Why buy 10,000 shares of a company now, when in a few years you could buy 10,500 shares for the same price?

That's fair - but that is assuming indefinite long-term deflation. What about intermittent modest deflation as a tool to bring prices down? It seems that just the idea of deflation is immediately rejected in any conversation about monetary policy.

Also, I think in the real world today, a home would still sell in a deflationary environment, given serious supply shortages. Especially for those buyers which are looking for a home and not an investment (investors would lose long term in a deflationary environment, as you say). Couldn't temporary, modest deflation actually open the housing market up for those "real" buyers primarily looking for a place to live?

The fear with trying for temporary deflation is it will become an out of control feedback loop, because there aren't as many "reasonable" monetary tools to combat it as there are with inflation.

As an extreme example, everyone knows about Germany hyperinflation in the 20s. Fewer people are aware that 1929-1932 was a period of massive deflation in Germany that led to the German economy collapsing, the Nazis siezing power, and 10 years later most of Europe being occupied by Fascists.

So it's pretty reasonable to be concerned about deflation.

There was a 20-year period of mild deflation during the Victorian Era: https://en.wikipedia.org/wiki/The_Great_Deflation

Broadly it was a time of sustained growth in both the United States and United Kingdom, despite the deflation which was driven by industrialization and productivity gains. However, certain industries did suffer as a result of the deflation, so it was neither an unvarnished good or bad economic period.

Speculative asset bubbles seem to tank money velocity more than small amounts of deflation. I think the 2% inflation target roughy yields the maximum long term sustainable capital gains tax.

If our government was actually as "green" as they say they are, they'd aim for this because consumers would slow down consumption to only buy what they need. But they know that inflation is another form of tax, and they're too greedy to say that inflation is anything but "good".

For a government, "green" isn't an end-goal, but a nice-to-have. People like the environment, but continued existence comes first, and that in turn required having a huge economy in order to make a huge military affordable, and that military is needed to maintain the continued existence of the government (as an institution rather than the specific jobs of specific people within it).

Prices drop and people spend less? That's silly.

It's more people see prices dropping hence their money increase in relative value so they save up more instead of spending it.

It just reminds me how unserious economic theory is. You can tell any kind of story you want.

So silly that it's exactly what happened during the Great Depression.

Context matters. Prices dropped because people had less money. They didn’t drop because people were sitting on piles of cash hoping for cheaper prices next year.

It’s not silly. If you know prices are only going down you might hold off on buying that house or car until later because you know you’ll just get it cheaper.

Depends if you need a house or not, the idea that people are treating future consumption as an investment does not seem to hold much weight. In a competitive market others will be making a similar gamble meaning rents will be higher than normal due to increased demand, and the market will normalize.

Nobody is going to wait a year to save 3% on food or energy.

No, but they will for cars, housing, even having children,

Well personally I'm cutting out as much consumption as possible, how is inflation not resulting in big drops in people spending?

You know what causes a downward spiral? People stop buying things, sales drops, layoffs / cuts, people buy less, etc.

I see companies freak out over 1-2% drops in sales, how is inflation not causing people to drop consumption by 10%? I don't travel, I'm eating out WAY less, I am price/bargain hunting far more. I never buy gas without gas price map checking. I'm holding back on as much purchases as possible. I don't even think about buying any clothes not on sale. Hell, I basically don't buy clothes unless absolutely needed.

Deflation means a dollar tomorrow is always worth more than a dollar today meaning a rational person should strive to spend as little money today as possible. This eventually locks the entire economy up into a death spiral.

Even with the prices of commodities falling, stock prices can still rise, and as long as this is higher than the deflationary rate, investing still beats hoarding.

I'm curious to know if this is a real phenomenon that has been observed. Would you be able to point me in the direction of resources to learn more about this?

The reason for my skepticism is that even without deflation, a dollar tomorrow is usually worth more than a dollar today, yet tons of people* don't save or invest much/any of their money, even if they're able to.

* I'm speaking from the perspective of an American FWIW.

A dollar tomorrow is worth less than it is today

Your local bank or credit union will trade your dollar today for more than a dollar tomorrow!

And they will simply take your physical dollar and store it deeeep under the ground where no wild west thieves can steal it or even look at it, so that they can store it until tomorrow where it will be worth more!

> even without deflation, a dollar tomorrow is usually worth more than a dollar today

No, that’s deflation.

If you’re talking about investing, that’s different. The dollar is still worth less on its own. It just made extra dollars in the meantime.

Japan had deflation. Can search for information on that. Many articles out there about it.

> This eventually locks the entire economy up into a death spiral.

The US economy had zero net inflation from 1800 to 1914. No death spiral.

The whole "2% is good for the economy" is propaganda to hide the fact that deficit spending causes inflation and is a tax on the economy.

>The US economy had zero net inflation from 1800 to 1914. No death spiral.

I've heard that £1 was worth the same in 1914 as in 1614.

The US economy was absolutely fucked for a large portion of that time period largely because of the lack of monetary policy. The economy has done much, much better since we introduced fiat.

Milton Friedman in "Monetary History of the United States" shows that fluctuations in the money supply were significantly more pronounced after fiat money began. The fed's enlightened hand on the tiller simply isn't as good as the blind actions of the free market.

fluctuations in the money supply are not necessarily a bad thing.

If they have proved unable at smoothing the small fluctuations, how can they do better with the large ones? And they didn't - the Great Depression.

You’re supposed to be getting raises to keep up with inflation. Inflation means rising cost of everything, including your labor. What is your source of a fixed income? Even social security has cost of living adjustments.

If it’s an annuity, you can get annuities that vary based on changes to the CPI. If you put a lot of money into a fixed annuity years ago, you did not properly hedge interest rate/inflation risk.

What you call "not getting a raise" is what companies called "getting a discount on labor"

Which is why laborers need to demand a higher wage to keep up with higher COL, like every other supplier in the economy would.

Most of the other responses are missing the point of your question. You really asking why central banks don't engage in targeting the price level, rather than price changes (=inflation). In price level targeting, they'd aim for higher (lower) inflation next year if they under-(over-)shot their target this year.

Academics and have studies the pros and cons. I don't have time to post summaries, but maybe someone else can step in:

https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed...

https://www.ijcb.org/journal/ijcb2002_3.pdf

It’s because that’s called deflation and mainstream economics predicts that it is absolutely catastrophic to the economy, at least if it is seen generally across the whole economy. Obviously, individual goods can decrease in nominal price, but general deflation is thought to lead almost immediately to depressions and recessions.

Correct

>> What I don't understand is this 2% price target.

It is statistical trickery and a headline number used to make people think things are OK. It is also a convenient number for COLA increase targets which make people think their incomes/pensions are going up (when effectively they are not on a real basis.)

Also, as you note, we re-baseline each year and dont talk about the cumulative compounded inflation e.g., over the past 5yrs.

Americans on fixed incomes (e.g., pension, social security) and those without wage elasticity (e.g., restaurant workers) are absolutely miserable right now because they are squeezed from both sides, even after modest wage increases in 2021/2022. This is not good for a Democracy.

Restaurant workers are probably the biggest winners over the past three years. Their wages are a large component driving inflation.

The wage-price spiral is a myth. The cause of inflation is, as usual, the government running the printing press and printing "free" money.

Then, the pesky Law of Supply and Demand devalues the extra money, which we call "inflation".

I didn't say anything about the wage price spiral. One category that has had above-average inflation is food away from home. That's mostly driven by wages of the workers, not wages of the clientele.

The pesky law you mention is indeed the issue. Not enough people are willing to work in restaurants, and/or not enough people are willing to modify their habits to avoid eating in restaurants when the prices increase.

Whether "printing" money was a cause of generalized inflation is a matter of debate. It's hard to argue it didn't have some effect, but I think you'd probably expect the inflation to have been worse if it were just dependent on the amount of dollars in the system. Given the tightness in the labor market and reduced workforce participation, it seems to me that the pandemic was a large-scale, impromptu test of the UBI, and society failed it very badly. Turns out people will actually not work if they don't have to, and robots are not yet prepared to pick up the slack.

> Whether "printing" money was a cause of generalized inflation is a matter of debate.

It's only a debate for people who haven't looked at the history of money and inflation. Inflation is always the result of an increase in the supply of money relative to the value of goods and services in the economy. It happens when there are gold rushes, silver rushes, and running the government printing press.

Our current inflation happened soon after a massive increase in deficit spending.

Low wage workers have actually seen the most wage growth recently.

https://www.epi.org/publication/swa-wages-2022/

>> Low wage workers have actually seen the most wage growth recently.

Yes and no(?)

From the study "Real wage growth across the wage distribution, 2019–2022" shows 9% real wage growth. The "real" portion is compared to engineered inflation figures. In the day-to-day world where people pay actual prices, price increases have not be 2% or whatever CPI claims them to be, they are much worse.

We can back into rosy numbers, but the real numbers are felt by people. I'd suggest speaking to a variety of people and see how they feel. Ensure to also speak to someone on social security income. I speak to my mom and see the numbers on a weekly basis.

Between 2008 and 2018 milk prices went down from $3.80 a gallon to $2.90 [1]. So we're actually barely above 2008 prices in non-inflation adjusted dollars.

To your specific point about targeting negative inflation, that's deflation, which most people believe is bad for the economy. Even if there are types of "good deflation", government policy inentionally targeting deflation would almost definitely be a bad thing.

1. https://www.usinflationcalculator.com/inflation/milk-prices-...

People get hired off the 2% because that’s a baseline level of growth. When the economy is in deflation people will constantly get fired every year, growth basically stops, and you end up with a highly risk averse Japan-type situation.

This is a drastic oversimplification but that’s basically it

Some inflation is seen as good by economists because it pushes money that would sit on the sidelines into "productive" uses. It creates an incentive and a need for risk taking or stored wealth will be eaten away. That this doesn't align with most individual's goal is of no concern to those most interested in productivity and GDP growth.

> Some inflation is seen as good by economists because it pushes money that would sit on the sidelines into "productive" uses.

The ever-popular Scrooge McDuck cash vault theory. Nobody has a cash vault. Any "cash" is stored in banks, which loan it out into the economy. People who borrow money save/spend it.