Why Should Europe (or Anyone) Fear Deflation?

Europe is fearful as it teeters on the brink of deflation. As the chart shows, September consumer prices in the eurozone were just 0.3 percent higher than in the same month a year earlier. That is far below the 2 percent inflation target set by the European Central Bank (ECB). Five countries were already experiencing deflation, and inflation was at zero in three others.

 

Still, despite all the gloomy deflation headlines, the most common question I get about deflation is, “So what?” If inflation is bad, why isn’t deflation  good?  Why should we do anything but celebrate if the prices of goods and services fall steadily year after year, and the value of our money rises accordingly? In this post, the first of two parts, I will try to explain just why a majority of economists think deflation is bad. In the second part, I will look at the views of a minority who think that deflation is actually a good thing, at least sometimes. >>>Read more