deflation

Comments are flying around about whether inflation or deflation is the greater risk. This is almost invariably interpreted as asking which is the most likely and therefore misses the central point. Inflation is a much greater risk – not because it is more likely but because its consequences are far worse.

Deflation has been demonised. It has been harmless or even beneficial in Japan. While I think it would hurt the eurozone, its impact would be mild and easily reversed – or it would be if German economic policy was not so obstinately foolish. Inflation poses a much more serious problem, particularly in Japan, the UK and the US. 

Deflation provides a good example of economists’ bad habits. They assume that people behave in the same way even if they live in different countries and that their behaviour does not change over time. They are sometimes right. But deflation and inflation show how misleading this tendency to generalise can be. Today deflation is a danger for the eurozone, but not for Japan.

Deflation can cause problems, but not always. As I pointed out in my previous blog, since its market crashed in 1990, Japan’s gross domestic product grew more when prices fell than when they rose. 

Abenomics – the policy endorsed by Shinzo Abe, the Japanese prime minister – aims to raise the country’s growth by getting rid of deflation. It is based on two myths. The first is that the economy has done badly and the second is that it has been hurt by deflation.

The first myth comes from judging a country’s economic success by its gross domestic product. Japan has a falling and ageing population. If allowance is made for this, Japan has been the most successful of all Group of Five leading economies. It is the country whose GDP at constant prices per person of working age has grown most rapidly, at least since 1999.