Currently we can observe a general slowdown in the annual growth rate in price inflation across major countries around the world. For instance the yearly growth rate of the US consumer price index (CPI) fell to 1.5% in February from 1.6% in January and 2.2% in February last year. In Europe, the yearly growth rate of the EMU CPI stood at 1.5% in February versus 1.4% in January and 2.3% in October 2018.
The annual rate of China’s CPI has also eased in February falling to 1.5% from 1.7% in January and 2.9% in February the year before.The growth momentum of the UK CPI also displays softening with the yearly growth rate standing at 1.8% in February against 2.1% in the month before and 3% in January 2018.
Most commentators are of the view that deflation generates expectations for a decline in prices. As a result, it is held, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators believe that policies that counter deflation will also counter the economic slump.For many commentators and economic experts to counter a decline in the annual growth of the CPI, which they fear could develop into a general decline in prices; they advocate that central banks should maintain a very loose monetary stance. For these experts a possible decline in prices — which they label as deflation — poses a major threat to the economy....
It would appear that if deflation leads to an economic slump then policies that reverse deflation should be good for the economy. Reversing deflation will simply involve introducing policies that support general increases in the prices