Historical Perspective on CPI Deflations: How Damaging are They?


A BIS Study show routine price deflation is a benefit. Central banks have not caught on.

Historical Perspective On CPI Deflations

In its March report, the BIS took a look at the Costs of Deflations: A Historical Perspective. Here are the key findings.

Concerns about deflation – falling prices of goods and services – are rooted in the view that it is very costly. We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt. 

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.

Once we control for persistent asset price deflations and country-specific average changes in growth rates over the sample periods, persistent goods and services (CPI ) deflations do not appear to be linked in a statistically significant way with slower growth even in the interwar period
. They are uniformly statistically insignificant except for the first post-peak year during the postwar era – where, however, deflation appears to usher in stronger output growth. By contrast, the link of both property and equity price deflations with output growth is always the expected one, and is consistently statistically significant.

The exception to the general rule was the Great Depression but, that was also an asset bubble deflation coupled with consumer price deflation.

Meanwhile central banks on every continent are worried about something they should welcome.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

Worse yet, in their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.


Comments (2)
No. 1-2

Hey Mish you know that since I consider myself a very good contrary indicator, since as I look back over the many choices and decisions I have made in my life I would have been much better off had I done completely the opposite! So having said that I don’t completely agree with you on your deflation analysis. Normally in years past we have seen some really outstanding deflation as a result of dramatic increases in productivity due to the age of information technology and its affect on almost every aspect of life, having greatly increased the standard of living for those of us who are fortunate enough to continue to live in a mostly free society. Yet just the other day on your blog, in two sentences some guy remarked that with all the debt we have in our financial system and around the world, we need some inflation to make it easier for debtors to make their payments with cheaper dollars. With deflation the asset behind ones debt deflates making it much harder to service the loan. So I borrow 10 million dollars to buy an oil field. If the price of oil collapses down say to 30 dollars a barrel, at that price I can no longer service the debt , and if the price stays at this level the bank will become the new owner of the oil field. Not a very good example ~wish I could find exactly what this guy said as seemed to make a lot of sense much better than what I’ve done here.


"Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.”

I’m not sure anybody really believes this.....Maybe so, I don’t hang out with central bankers so I don’t know for sure.

But I’m tempted to say that the belief that matters here...... is the belief that inflation is a practical and politically expedient way to deal with otherwise impossible-to-manage government debt. And that without steady inflation that the entire debt-based money house of cards eventually ends up in massive bank defaults and national bankruptcy.

So it’s a lesser evil argument, inflation. And the evil is in the eye of he beholder.

Like Lloyd Blankfein.....Yellen and Powell see themselves as doing God’s work.

Others might disagree. :)

Global Economics