We’re all about buying the things we love on the cheap, so the prospect of prices falling across the board sounds pretty good. But, despite our desire to nab the same items for lower prices, many members of the Fed are very concerned at the prospect of deflation. On Tuesday, they released the minutes of their most recent meeting, which revealed that they may take actions to prevent deflation. So, we ask: What exactly is deflation, and wouldn’t the Federal Reserve want us to enjoy lower prices?
A Slow Rise In Prices Is Natural, And A Drop In Prices Can Actually Be Dangerous
Inflation—the upward movement of prices that happens naturally over time—is currently below the Fed’s informal targets, and the International Monetary Fund released a report last week stating that there’s a real risk of deflation—a downward movement in prices—in the United States. Deflation is a scary concept for a few reasons:
Bottom line: Not good.
Why Do People Keep Talking About Japan?
The topic of Japan keeps coming up because pundits see many parallels between our position now and Japan’s in the 1990s. After a stock market and real estate peak in the late 1980s (much like ours a few years ago), its property bubble burst and economic growth has stagnated ever since. National debt has soared above and beyond what the country itself can produce, and consumer prices have fallen. Ever since finding itself in the midst of this deflation spiral, the country has had an extremely difficult time trying to reemerge. Back in the 1990s, Ben Bernanke, our current Fed chairman, chastised Japanese officials for failing to take strong enough government action to fix the situation. Now, he’s trying to follow his own advice.
Will We Fall Down The Deflation Rabbit Hole?
Economists keep looking to Japan and asking whether we’ll experience something similar, but there are key differences between our situation and theirs. The U.S. hasn’t experienced any real deflation in the modern era, and Bernanke is aggressively trying to fix the situation.
The jury’s out, as commentators disagree about whether or not we’ll actually experience a long period of deflation, but the most important takeaway for us is to do nothing for now. Don’t hide your money under your mattress or do anything drastic—all we can do is to wait, see what happens, and take heart in the fact that our political leaders are trying their hardest to learn from history in order to keep the economy running smoothly in the future.