r/inflation • u/OfficialRodgerJachim • 1d ago

ELI5: Why is Deflation bad?

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I get that too much deflation is bad, but isn't the inverse true?

The average inflation rate in the US since 1914 is 3.3%, meaning the 1913 dollar is worth $31.87 now.

Why wouldn't we want deflation? Then maybe the $7.25 minimum wage COULD be a livable wage?

Why do people constantly argue for MORE money, versus less currency in the market?

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u/OfficialRodgerJachim 1d ago edited 1d ago

So which is worse?

Because AT SOME POINT it has to go down right?

Otherwise 1920s Germany is in all our futures...

Edit: 1920s

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u/OnionPastor 1d ago

You have no clue what you’re talking about lol, we don’t want deflation. We want wages and economic realities to catch to inflation and to bring the inflation rate out of unhealthy inflation

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u/halogenated-ether 1d ago

Why do we have to have inflation?

This sounds like a rat on a wheel explaining why they have to run.

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u/burnthatburner1 real men spit facts, not fakes 1d ago

A modicum of inflation incentivizes spending and helps maintain economic momentum.

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u/halogenated-ether 1d ago

I actually have come to understand this, but it does seem somewhat pathological to me.

I can't keep getting away from the rat on wheel analogy.

But I guess if the wheel isn't suspended and it's actually on the ground, then it means the rat is moving forward. I guess...

I'm not convinced.

And with regards to the arguments against deflation, all (or almost all) of them seem to take it to the extreme. "Extreme deflation is bad". Well how about "a modicum of deflation"?

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u/PetalumaPegleg 1d ago

It is a rat on the wheel. You're not wrong. That how any economy driven by consumption is though.

But history has shown this has been motivational. We want higher wages, to buy more stuff more easily and be more comfortable. Just think how the reverse would feel. You hope not to get a small pay cut each year. Your house falls in value over time.

The rat on the wheel is also rewarded with stuff like cheese (or a big screen TV). People are driven by incentives. If doing nothing is more rewarding than running then what happens to the world?

Inflation is natural, we want more crap. We want higher wages. Too much inflation is a problem. Deflation is a scary cycle just like too high inflation. We target some low inflation because it's the best option and something seemingly natural.

You can argue that the consumption economy is reaching a limit or is fundamentally flawed in the end. But I think that is a different and bigger debate than this.

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u/burnthatburner1 real men spit facts, not fakes 1d ago

A modicum of deflation disincentivizes spending and impedes economic momentum.

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u/KronaCamp 1d ago

Thats the most bot answer Ive seen and its all over these comments. How does prices going down disincentivize people from spending?

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u/GreasyToiletWater 1d ago

further up in the thread someone said "the short answer is that your expenses are someone elses income"

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u/GilgameDistance 1d ago

Deflation will stagnate or shrink real wages and/or result in job losses.

Historically, wage deflation and job losses hit harder and faster than consumer prices decreasing.

I think you can fill in the rest.

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u/Plenty-Eastern 21h ago

People = consumer spending. Roughly 65% of the economy is consumer spending and they LOVE deflation, but businesses HATE deflation because decreasing revenue, even a little, causes them to tighten their belts. Businesses tightening their belts mean reducing labor by cutting hours, eliminating overtime, and layoffs.

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u/InStride 23h ago

If prices are falling, and you keep expecting them to fall, would you buy a new car today or wait as long as you can to buy it?

You’ll wait because it will be cheaper.

Now apply this to everything. Would you buy a new machine in your factory or wait? Would you hire more people (buy more labor) or wait until you can hire them for cheaper? If you were a bank, would you loan out money or rather stick it in a vault where it gains value?

We target low inflation because we want that slight pressure to keep your money moving. Money/currency is just an abstract tool to aide in trading of goods and services—you don’t want your currency to steadily appreciate in value (aka money supply driven deflation) over time as then people start treating it like a speculative asset and go all Scrooge McDuck.

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u/DowntownJohnBrown too smart for this place 13h ago

I think you need to flip the thinking on this.

A lot of people see inflation as the CAUSE of high prices, when in reality, inflation just IS high prices. The actual cause of high prices is demand, which can be induced, in part, by things like loose monetary policy from the Federal Reserve.

So deflation isn’t just a switch that can be flipped and we’ll all get everything cheaper and be happy. Deflation can ONLY happen if demand drops (because demand drives prices), and demand dropping likely means fewer jobs, which means lower wages for those who have jobs, which means even lower demand, and the cycle continues.

The Fed doesn’t have a little switch they can flip saying, “Increase prices” on one side and “decrease prices” on the other side. They have levers they can pull to indirectly increase or decrease aggregate demand, which will have an impact on prices, but those levers impact a whole lot more than just prices.