Deflation is Coming

Photograph by Ralph Orlowski/Bloomberg

Colorado’s minimum wage is set to decline next year due to a decrease in the inflation rate during the first half of the year, according to an order from the Colorado Department of Labor and Employment. The new order would lower the state’s current hourly minimum of $7.28 to $7.24 on January 1. … Rich Jones, director of policy research at the Bell Policy Center, Denver, said he hopes employers will focus more on maintaining goodwill with their workers rather than lowering wages because they can.
—Aldo Svaldi, Colorado Minimum Wage Set to Fall, Denver Post, Oct. 13, 2009

… because they can.

It’s back. But history would suggest it never went away.

A quick reading of the very good—not great—Wikipedia essay on Deflation would suggest that a) bouts of price decline are more frequent than we believe, b) any discussion is tinged with politics and the required policy response, and c) economists fear deflation, above all.

The primer on deflation is Deflation by A. Gary Shilling. Read it. There will be a quiz.

I bring this up because worried economists are spending an inordinate part of this November 2013 explaining why there is little to worry about. (If you’re not concerned, meet me in St. Louis with one James Bullard of the St. Louis Fed for a conversation on the asymmetric risks of rapid disinflation.)

Various vectors of price change show price increase (inflation) in selected “troubled”—or yes, a bit booming—economies. (The United Kingdom! Who would have thought?). And a decreasing rate of increasing prices (disinflation) in numerous economies. And the tinge of aggregate price decline (deflation) in a set of stagnant nations.

Deflation pros make a critical distinction between wages falling after adjustment for modest inflation (or the goofy math of your paycheck under modest deflation) and the outrageous social cost of persistent, indeed chronic, wage deflation. Daniel Yergin beautifully captures this in Clement Atlee’s England in The Commanding Heights.

Hopefully, we won’t “capture” significant deflation anytime soon.

Within this fourth quarter of 2013, economists are thinking, stewing along Y=C+I+G+NX. But lurking in Europe and America are shades of disinflation and deflation. We have adults—think Ben Bernanke, Mario Draghi, and Janet Yellen—acutely aware of the need to avoid the numerous policy challenges of disinflation migrating towards deflation.

Still, for the gloom crew, a real-economy stagnation lurks that could seep over to affect more robust, more responsible nations. For them, deflation is coming.


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