Some economic dogmas are so thoroughly used by “specialists” and repeated in the media, that everyone seems to agree with the ideas transmitted, even if they are erroneous or at least highly debatable. This is the case with respect to the alleged goodness to have one 2% inflation and it harmful what is it to have one negative inflation or deflation. Taking into account that the inflation equals an invisible tax that is reducing the purchasing power of the currency, such statements are highly debatable and have a practical impact on the daily lives of people and investments.
According to the ECBthe inflation is the measure of How consumer prices vary over time. To calculate this evolution, a “shopping basket” of products and services that represents household consumption of a certain country. Month by month, the evolution of the prices of the products that make up said basket is followed. The Inflation is expressed as a percentage of the variation in prices of the shopping basket in a month compared to the same month of the previous year.
So much the ECB as the Fed are marked as inflation target 2% on averageconsidering that This level prevents deflation and allows for smooth economic adjustments, preventing excessive unemployment. It is a mistake to associate negative inflation with deflation. In the years in which Spanish inflation has been negative in this century (2014, 2015, 2020) there has not been a general decrease in prices, but rather a fall in certain items (gas, water, electricity, fuels, transport and communications) , due, above all, to the fall in the prices of fossil fuels, which are also imported.
It is argued that a general drop in prices increases the expectation of additional falls in the future and this causes consumption decisions to be postponedharming the economy in general, by reducing investment and producing a vicious economic circle. The shadow of the great depression of the 1930s continues to weigh too heavily. In this century, when negative inflation rates have occurred, consumption has not suffered, quite the contrary. In the case of inflation falling to negative rates in 2014 and 2015, it occurred due to a lower cost of expenses borne by all households, such as household supplies and transportation. The savings in households, due to these lower costs, could be dedicated to other expenses.
Ben Bernankebefore becoming chairman of the Fed, gave a speech in 2002 under the title “Deflation: let’s ensure it never happens here“. Among the measures proposals to avoid deflation were found purchase of treasury bonds American and even the use of “monetary helicopter”. The Fed ended up using both measures, purchasing huge amounts of US public debt and sending checks to families after the pandemic. Deflation would be avoided, but it ended up creating the highest inflation since the 1970s.
A negative inflation reflects a decrease in the cost of the shopping basket. Except for a crisis like the one in the 1930s, it is difficult to understand why this is harmful to the economy. In recent decades, we all have experience of the drop in prices of technological products or consumer products such as clothing. This allows these products to be accessible to more layers of the population. As an example, the drop in the price of televisions, with an increase in features that is difficult to quantify, has been a constant. Here, as in many other sectors, these price drops have not been a problem for the development of the sector.
Since the creation of the euro In 1999, the average inflation in Spain has been 2.3%. It may not seem high, but the consumer price index in Spain, or accumulated inflation has been 83%although not all items have increased their prices at the same rate. In this period, the food has increased its cost by 187%and the household supplies (water, electricity, gas and fuel) they have doubled their costwhile the communications have reduced their price by 27% in those 25 years.
In the last four yearsthe accumulated inflation It’s almost the 20% (19.4%). Again, the item that increases its cost the most is food, 34%while communications continue to reduce their price, by 3%. Therefore, for many homes whose spending on food is a high percentage of their shopping basket, Its family inflation is significantly higher than the official one.
In order to recover part of the purchasing power of the currency, it is essential that negative inflation occurs, although central banks fight against this eventuality. Although inflation has dropped from 10.7% from July 2022 to 2.8% last December, prices continue to risealthough at a slower pace, but from a higher level.
There is nothing wrong with negative inflationespecially if it is due to the lower cost of imported products such as fuel, as happened in 2014 and 2015. At some point central banks will have to differentiate between deflation (general drop in prices) negative inflation. It is highly debatable that an inflation of 2% is beneficial for the economy in general, although it is beneficial for the heavily indebted, mainly the states.
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