Financial analysts are issuing warnings about the deflation that is occurring in China. In November, consumer prices fell .5 percent, the largest decline in three years. CNN reports that deflation is bad because consumers and businesses may delay purchases in the hope that prices decline further. But is deflation really bad?
Deflation means a general decline in prices. Lower prices are beneficial to consumers—they get more bang for their buck. Contrast that with what happens during a period of high inflation.
When inflation was soaring to forty-year highs, we were deluged with stories of the hardships higher prices were causing consumers. They had to delay purchases, re-arrange budgets, and find ways to economize. Deflation may cause some consumers to delay purchases; inflation makes it necessary for most consumers. Deflation decreases the cost of living. Inflation increases the cost of living.
In the late 1800s, America experienced a period of deflation. In my book, Individual Rights and Government Wrongs, I explained what happened:
Between 1870 and 1889, wages for non-farm labor decreased from $1.57 per day to $1.39 per day, a decrease of 10.2 percent. During the same period, the Consumer Price Index decreased more than 23 percent. Even though wages for unskilled labor fell by more than 10 percent over twenty years, prices fell by two times as much, that is, a dollar bought a lot more. Further, there was much more available: canned goods became widely available in the 1880s, which provided a much more varied diet, such as fruits and vegetables that were not in season; refrigerated railroad cars made it possible for urban residents to eat fresh meat, grapes, and strawberries more frequently; improvements in the sewing machine enabled manufacturers to mass produce clothing at low prices; department stores offered consumers wide selections in clothing, household goods, and more. In short, the unskilled worker’s life was immensely better in 1889 than it had been in 1870, even though he was paid less. In a free market, this will always be the case.
The analysts are wrong when they claim that deflation is bad. When the cost of living decreases, individuals can improve their standard of living. They can purchase products that were previously unaffordable. They can purchase more of the items that they want or need. If one’s standard is that which enables individuals to improve their standard of living, then deflation is certainly not bad.