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Central banks, including the Fed, have long propagated the idea that deflation is detrimental to the economy, creating a framework where any signs of deflation are met with policy interventions to stimulate spending and inflate prices. This persistent fear is rooted in the belief that deflation can lead to falling wages and increased unemployment, creating cycles of economic downturn.
The Two Faces of Deflation
It’s crucial to understand that there are different types of deflation. Healthy deflation occurs as economies grow, often stemming from increases in production and innovation. In this context, prices fall because the supply of goods increases faster than the supply of money, allowing consumers to enjoy lower prices alongside rising standards of living.