Is Deflation so Bad?

Via Timothy Taylor, the Bank of International Settlements (BIS) has a new report out on deflationary episodes.  Looking at the five years prior to an episode of deflation and at the five years after inflation, they do a kind of diff-in-diff estimator of whether the deflationary episode resulted in slower growth.  They find that, with the exception of asset price deflations, deflation alone does not lead to lower growth.

This is not that surprising to me.  When I first learned about deflationary spirals, I found the idea captivating, and it made a lot of intuitive sense.  However, upon reflecting on my own behavior, I realized that I do not behave the way the standard story goes.  For example, technology goods have famously gotten cheaper through the years, but I still line up to buy the latest edition, even though I know the same product will be cheaper in a year.

And it’s not just me.  Personal consumption expenditures on video, audio, photographic, and information processing equipment and media has not only steadily grown through the years, it has actually doubled as a percentage of total PCE since the 1960’s (from 1% to 2%).

Screen Shot 2014-07-31 at 12.13.13 PM

In an industry where there is consistent deflation, there has been massive growth.  This certainly seems consistent with the story told by the BIS.

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