I am a veteran of deflation. Japan was in deflation for most of the time I lived there. Now, Britain is flirting with deflation. In 2015, we had three months when the annualised inflation rate was negative. A couple of times we had a 0% rate which caused people to wonder what you called it when it was neither positive nor negative. (Popular answer: “noflation”)
It’s strange because the British have very little understanding of deflation. No one has ever experienced falling prices on an overall basis. Indeed, we are used to things like gas, electricity, train fares and beer going up every year by more than inflation. Meanwhile in Japan, a whole generation has grown up knowing nothing but deflation.
The thing about deflation is that I rather like it. I like that money I save will not see its value eroded. There was a period when inflation was around 5% and the best interest rate I could get at the bank was less than 3% I felt like I was being robbed.
In my view, Japan in the mid-1990s was a country in dire need of some re-pricing. It was ludicrously expensive when I first went there (compared to Britain). Now, it’s a country that has some very competitive prices, which is one reason why the tourist industry is booming.
Of course, it is economic common knowledge that persistent deflation is a dangerous thing. Mainly, this is because it makes the servicing of debts harder. My argument would be that people (and companies and countries) should be wary of taking on too much debt in the first place. It’s a moral hazard if countries are heavily indebted and hope just to reflate the debt away. Effectively, they are asking the prudent to subsidize the profligate.
Another argument I hear all the time about the danger of deflation is that people defer buying things in the expectation that they will be cheaper if they wait. I am not entirely convinced by this. I bought a nice, big plasma TV for £400 in 2011 with the intention of making it last a decade. The other day I saw a TV with a bigger screen that was lighter and thinner. It had more functions, better picture quality and was LED (so uses less energy). It was on sale at £369. So it’s a pretty clear example of a good that is getting cheaper.
But my instinct was not “well, I must wait for that to get even cheaper” but rather, “crikey! Maybe it’s time to replace that old piece of junk hanging on my wall.”