What we can learn empirically about deflation and its consequences

Frankfurt am Main

History shows that deflation is not the economic drag or threat of which economists and central banks habitually warn. The fear of deflation is not based on established fact, but on economic theory and doctrine. Typically, economies in which prices fall have consistently strong currencies and experience superior economic and stock-price performance thereafter. Another possible consequence is negative interest rates. The cost of living may or may not actually decline, but the most unambiguous sign is in falling prices for commodities that are traded in competitive, liquid, markets. These are far more sensitive and timely indicators than indexes of consumer prices compiled by governments, in which long-lagging price components such as rent are given the most weight. Deflation sometimes results from economic weakness if that is severe enough, but economic weakness does not result from deflation.