The deflation scare is back, as Jon Hilsenrath and Brian Blackstone report on the front page of The Wall Street Journal. It’s worth taking a moment to contemplate why deflation is such a bad thing. After all, falling prices sound appealing to consumers, especially compared with the alternative of higher prices.
Here are five reasons:
1. Deflation is a generalized decline in prices and, sometimes, wages. Sure, if you’re lucky enough to get a raise, your paycheck goes further–but those whose wages decline or who are laid off or work fewer hours are not going to enjoy a falling price index.
2. It can be hard (though, as we’ve seen, not impossible) for employers to cut nominal wages when conditions warrant; it’s easier to give raises that are less than the inflation rate, which is what economists call a real wage cut. And if wages are, as economists say, marked by “downward nominal rigidity,” then employers will hire fewer people.
As Paul Krugman put it i