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December 19, 2008

Is deflation good?

We're hearing the word "deflation" today in discussions about the economy. What is deflation, and is it something we should welcome or worry about?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, actually deflation is the opposite of inflation. Inflation means that on average, prices are rising. Deflation means that on average prices are going down, and we've actually seen a little bit of deflation over the last couple of months, primarily due to lower energy prices. Now, many people might think, wow, that's great, prices are going down. But there are two potential problems. One is that if prices go down for many months, you'll actually see wages and salaries also go down. They move in tandem. The other factor is debt. Your debt can actually get bigger, relatively speaking, if we have deflation. How so? Because your debt payments are usually set in a particular dollar amount. So if your salaries and your wages are going down because prices are going down, that makes your debt actually relatively more expensive. Now the Federal Reserve can counter deflation simply by printing more money, and if we do get into a deflationary spiral, I think that's exactly what they'll do."

Posted by Dave at December 19, 2008 08:00 AM