NCPA - National Center for Policy Analysis

Don't Worry About Deflation

November 2, 1998

The world economy is undergoing disinflation, not deflation, say economists Martin and Kathleen Feldstein, emphasizing the distinction between the two. Deflation occurs when the overall price level falls; disinflation means a decline in the rate of inflation. Such changes in the behavior of prices reflect monetary policies -- which in the United States are determined by the Federal Reserve.

Not since the Great Depression, say the Feldsteins, has the U.S. and world economy actually undergone a general deflation.

  • There have been seven U.S. recessions in the past 40 years, and prices have continued to rise in every one.
  • Recent falls in stock prices don't signify deflation -- any more than the tenfold rise in share prices since the early 1980s constituted inflation.
  • And recent increases in the general price level show a low rate of inflation -- with the consumer price index increasing by 1.6 percent in the 12 months leading up to August 1998, and by 2.2 percent in the most recent three months.

Japan is the only industrialized country that is actually experiencing deflation, with consumer prices falling 0.3 percent over the past year and at a rate of 2.2 percent in the past three months. Meanwhile, although the "crisis" economies of Southeast Asia are in recession, they are still experiencing substantial inflation, ranging from 5.6 percent in Malaysia to 81 percent in Indonesia.

The restructuring of health care, falling oil prices and the strong dollar have kept consumer prices in general from rising. But oil prices and health care costs are likely to rise next year, while the dollar has fallen against other currencies. So even if there is a recession in 1999, the inflation rate is more likely to be higher than lower.

Source: Martin Feldstein (Harvard University) and Kathleen Feldstein (president, Economics Studies Inc.), "Donít Panic," New Republic, November 2, 1998.


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