The Student Room Group

Inflation v Deflation

Which is worse?
Original post by Blyts-_
Which is worse?


That depends. :wink: Which do you think is worse?
Depends
Deflation is generally regarded as much worse.

Negative multiplier
Interest rate policy is pretty much ineffective (always a positive real rate of interest on savings)
Slows down consumption (things will be cheaper in the long-term) / Increased marginal propensity to save
Reply 4
Second what the guy above said. Some positive level of inflation is regarding as a good thing, deflation is one of the worst things that can happen to an economy.
A little expansion as to why deflation is usually regard as worse: is that it becomes exponential, in the sense that consumers understand that prices will fall and therefore continuously put off purchasing. And for the reasons aforementioned it is extremely difficult to get out of. A favourite case study of mine is America during the 1930s. It experienced a fall in the average price level of roughly 50%. Which required pretty much WW2 to end. (This is a short explanation, the effect of the ND & WW2 on America's reflation is an area of controversy, but would be enough if you want to give as an example in economics).
Original post by Blyts-_
Which is worse?


I've got a whole essay on this. Send me your email, I can send it to you.
Reply 7
Which countries are close to deflation or have had a period of it within the last few years?
Reply 8
Original post by Blyts-_
Which countries are close to deflation or have had a period of it within the last few years?


Japan is usually the notorious example. The poor Japanese are usually close to deflation at any given moment. They've been in and out of it over the past couple of decades. Their last stint of deflation was between mid 2012 and mid 2013. It looks like their inflation is now heading upwards though (thankfully).

http://www.tradingeconomics.com/japan/inflation-cpi

Trading Economics is a good site for data of any kind for most countries since the 60s/70s.
Original post by Blyts-_
Which is worse?

Definitely deflation, since even on a small scale it causes a long-term problem (see: Japan's ten lost years and the Paradox of Thrift).
Reply 10
Worth noting that under first best conditions a negative inflation rate can be optimal.

Quick Reply

Latest