Not all deflation is the same. In this case, cheaper oil wears the white hat — for now
When you fill up your car with cheap gas, there’s a group of economists who just hate it. That’s because in many parts of the world the biggest worry for economic stability is the plague of falling prices.
It’s called deflation. Many economists consider it to be a dangerous disease that has spread from Japan to the heart of Europe where this week even mighty Germany has succumbed. Now central bankers are worried it could sweep the world.
Although oil prices have crossed back above $50 US, last year’s crash from over $100 is just now feeding into inflation calculations. Yesterday, central bankers in Australia and India joined thelong list trying to boost their economies and stave off deflation.
Inflation makes money worth less. Deflation has the opposite effect.
During times of, say, 10 per cent inflation, if you carry a $100 bill around in your wallet for a year, at the end of the year it will buy 10 per cent less. But during 10 per cent deflation, keeping the same $100 will buy you 10 per cent more. That sounds good.
But the reason deflation frightens economists is that falling prices go hand in hand with economic stagnation. As with many economic phenomena, it is not absolutely clear whether deflation is the cause of recession, or whether it’s the other way round.
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