Two brief periods in the US, the first from around mid-1949 to mid-1950, and the second from the autumn of 1954 to the summer of 1955, indicate cycles of deflation
in the CPI index.
If central banks have done enough to quell deflation, then it is most likely that the dominant theme will be the gradual recovery of growth, and an increase in pricing power that will improve corporate profitability and earnings growth.
Without central bank stimulus measures, deflation will probably define the rest of the decade.
Inflation and deflation of debts produce very different outcomes.
Deflation, on the other hand, increases debt, and feels like being smothered by a lead blanket.
The political response to deflation is to call for a stronger state.
This article reviews the conventional view of deflation, which assumes that deflation is always harmful, and contrasts it with a more nuanced view of deflation, which makes a distinction between deflationary pressures originating from the aggregate demand and the aggregate supply sides of the economy.
Deflation returned as a pressing issue as Japan struggled with its weak economy and falling price level and inflation in many of world's advanced economies declined significantly Between 1995 and 2004, Japan's economy grew an anemic 1.
Most of the renewed interest in deflation has been premised on a belief that deflation is harmful to economic activity (Stern 2003).
Why act now instead of lowering the funds rate if and when deflation
Economic theory suggests that deflations potentially pose three main dangers.
Would periodic deflations that may be experienced by a central bank pursuing a zero inflation target likely wreak such economic havoc?
The first of the three principal dangers posed by price deflations is that they can increase the cost of capital, thereby discouraging investment and causing output to fall.
These low inflation rates raise the risk that the US and the euro zone could be entering their own deflation trap with lost decades of low growth and deflation ahead, like in Japan.
Since the 1990s, the Japanese economy has languished in a feeble state of weak growth and deflation that persisted into the 21st Century.