Slate
July 3, 2010
The talk about the economy in recent weeks has been somewhat deflating. There's the ongoing crisis in Europe, disappointing jobs numbers, a falling stock market—and the prospect of deflation itself. Deflation—the evil twin of inflation—rears his ugly head with great infrequency. He hasn't been seen around these parts for nearly 80 years, and there's no committee that convenes to declare his return, as the National Bureau of Economic Research's Recession Dating Committee does for economic contractions.
Economists generally agree that deflation is a widespread fall in prices, as measured by the consumer price index (CPI). "I don't know if there is a textbook definition, but I would want to see a full year of falling consumer prices before I announced that deflation was in process," said Brad DeLong, professor of economics at the University of California at Berkeley. The CPI, up 2 percent in the past 12 months, fell in both April (-0.1 percent) and May (-0.2 percent) and has been basically flat for the first five months of 2010.
What's so bad about deflation? After all, it's a pleasant surprise when prices of many items fall. Generations of Econ 101 students and central banks have been schooled to think that inflation is the great boogeyman, since it erodes the value of savings. And for much of our lifetimes, moderate inflation has been the norm.
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