Who knew deflation could be so controversial? On Saturday, I wrote a post about why low inflation concerns the Federal Reserve. I explained that economists fear low inflation could lead to deflation, which has several negative consequences. That claim evoked many reader comments and e-mails disputing the claim that deflation would be bad. It is worth considering some of these, as this is not a simple question.
Before getting into any potential arguments for deflation, however, it's important to explain what both inflation and deflation do on a very fundamental level: they redistribute wealth. So whether you are an advocate for inflation or deflation really depends on your personal finances. If you have lots of debt, then you'll love inflation, because you can more easily pay back that debt. If you have lots of cash savings, then you'll love deflation, because it will make you relatively richer.
Is Deflation Is Good For Workers?
And that brings us to one e-mail I got from Stephen who says:
Deflation in a small way, would allow 'average' workers who have given up a lot of purchasing power over many years to reap a tiny benefit as prices fall. Given their meager wage increases, and more likely stagnation, over many years, deflation would help compensate for the many years of losses. But with inflation, wages never keep up.
This logic only works in the very short term. Eventually, during a deflationary period, employers will begin cutting pay. They won't be able to afford to pay workers as much if deflation forces them to cut their prices. Revenue declines, so their costs (including wages) must decline as well to continue to make a profit. If deflation lasted long enough, the government would even likely be forced to cut the minimum wage.