The Stanly News and Press (Albemarle, NC)

Opinion & Letters to the Editor

July 31, 2013

Can inflation be too low?

Wednesday, July 31, 2013 — I was listening to Fed chairman Ben Bernanke the other night speak at a press conference (I know, I need to get a life). Anyway, he said something that struck me as very contrary to the way most people think. He said — and I am paraphrasing — that while inflation can certainly be too high, it can also be too low.

Actually, I agree with him. So it’s Ben and me against perhaps the majority of people, who think inflation can never be too low. Let me see if I can explain my (and Ben’s) thinking, and then let you decide if we’re way off course.

First, here’s the easy part. Most agree inflation can be too high for both the good of the economy as well as the good of most people. Of course, by inflation I mean the rise in an average of prices, which some translate to mean a rise in the cost of living. While there’s a technical difference between the two, I won’t quibble.

Higher inflation hurts households in several ways. It means we have to pay more for the things we buy. It means, therefore, we have to get bigger pay raises to keep up with the higher cost of living, which, to say the least, is very difficult in today’s challenging economy. It also means we have to earn more on our investments to keep ahead of the erosive power inflation has on the value of our invested dollars. Sometimes that means taking more risk in our investments.

High inflation also drives up interest rates, making it harder to borrow money to purchase a home, vehicle and furniture, and for younger people, it’s more expensive to borrow money for college.

Last, inflation makes it difficult for the “signaling power” of price changes to work their magic. Changes in the price of a product (or service) give us important information about its relative scarcity. When the price rises, that tells us the product is scarcer, and more people are trying to buy a limited supply. The higher price motivates many of us to look for alternatives.

Conversely, when the price of a product drops, it says supplies are abundant and the product is a relative bargain. This motivates many people to stock up while the bargain lasts.

High inflation makes it tougher for these price signals to come through. If most of a price change is simply due to inflation, then inflation can overwhelm — or mask — any price fluctuations due to fundamental changes in supply or demand.

The last time we had very high inflation was in the late 1970s and early 1980s, when the rate hit double-digits and mortgage rates for home loans were near 20 percent. Fortunately, we’re nowhere near those levels today. Most measures of retail inflation — again, averaged over all products and services consumers typically buy — are hovering between 1 percent and 2 percent annually.

Now let’s go to the hard part of my task today. Can inflation ever be too low? Chairman Bernanke thinks so. I also think so. But are we thinking clearly?

Actually, when Chairman Bernanke worries about low inflation, his concern is really about negative inflation, meaning a sustained drop in average prices. Yet, what would be so bad about seeing lower prices in stores, shopping centers and malls?

There can be several problems. Wages and salaries would also drop along with prices. If business revenues are lower due to lower prices, then firms have fewer funds to pay workers.

Debts would also become more difficult to pay. Debt payments — say, on a home mortgage or car loan — are usually specified in a set dollar amount, like $250 or $500 a month. But negative inflation increases the purchasing power of the dollar, making the dollars repaid worth more. This adverse impact is made even worse if the household’s salary has also dropped.

Falling prices can motivate households to postpone buying, obviously thinking products and services will cost less in the future. But since 70 percent of our economy is driven by consumer spending, any significant slowdown in household buying can send the economy into a tailspin.

It is for these reasons that negative inflation (technically called deflation) can be scary for the economy. Economists think the negative inflation that occurred in the 1930s in our country and in 1990s Japan contributed to the lousy economy in both of those periods. The last time we had negative inflation was 2009, and that wasn’t a very good year for households or businesses.

So like with many things in life, too much of a good thing can actually be bad. In this case, the “good thing” is low inflation, and the “too much” is inflation that is so low it is negative. This is what Ben Bernanke means when he says he will defend against inflation being both too high and too low. You decide if he’s right.

Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy.

1
Text Only
Opinion & Letters to the Editor
  • Almost half of America's obese youth don't know they're obese

    WASHINGTON - The good news is that after decades of furious growth, obesity rates finally seem to be leveling off in the U.S.. The bad news is that America's youth still appear to be dangerously unaware of the problem.

    July 23, 2014

  • Darth Vader is polling higher than all potential 2016 presidential candidates

    On the other hand, with a net favorability of -8, Jar Jar is considerably more popular than the U.S. Congress, which currently enjoys a net favorability rating of -65.

    July 23, 2014

  • D.G. Martin Where did all these new voters in North Carolina come from?

    “Voters born elsewhere make up nearly half of N.C. electorate.”
    So begins the latest DataNet report from the UNC Program on Public Life, directed by former journalist Ferrel Guillory.

    July 23, 2014 1 Photo

  • Patrick Gannon Some light for Dems in their time of darkness

    RALEIGH – Earlier this year, state Sen. Ben Clark, a Hoke County Democrat, became a hero for a day among his party and environmentalists when his amendment to require more well water testing near future fracking sites passed the Senate. It even gained the support of a number of GOP senators, against the wishes of the Republican bill sponsor.

    July 23, 2014 1 Photo

  • mama.jpg What we get wrong about millennials living at home

    If the media is to be believed, America is facing a major crisis. "Kids," some age 25, 26, or even 30 years old, are living out of their childhood bedrooms and basements at alarmingly high numbers. The hand-wringing overlooks one problem: It's all overblown.

    July 22, 2014 1 Photo

  • Doug Creamer Maintaining hope

    Gardeners are facing challenges with the weather this year. It seemed like we were getting great conditions in April and May. The weather was warm and we were getting some good rains. Then sometime in June the rain stopped. It got so dry that I didn’t have to cut the grass. While I enjoyed the break, the garden was not happy at all. I was having to water quite a bit to keep the vegetable garden alive and growing.

    July 22, 2014 1 Photo

  • Jason O. Boyd I may be a bit behind the times, but at least I can find ‘America’

    I seem to be reading about and dealing with technology a lot lately.
    I  love technology and have always been fascinated by gadgets of all kinds and the wonderful things they can do. You never seem to go through an entire day without some form of invention enhancing your life.

    July 21, 2014 1 Photo

  • Brent Laurenz Meeting out in open helps negotiations move ahead

    RALEIGH – State lawmakers reconvened in Raleigh on May 14 promising a brief legislative session this summer, but as July moves along they are still in town and tackling big issues.

    July 21, 2014 1 Photo

  • Larry's Sketch 7.16.14.tif They don’t give a darn for Duke University

    John “Duke” Wayne’s heirs are suing Duke University over trademark rights.

    July 21, 2014 1 Photo

  • Your chocolate addiction is only going to get more expensive

    WASHINGTON - For nearly two years, cocoa prices have been on the rise. Finally, that's affecting the price you pay for a bar of chocolate - and there's reason to believe it's only the beginning.

    July 18, 2014

House Ads
Seasonal Content