<p>Yes, inflation can be negative; it is called deflation. (Regarding terminology, @1muflon1 points out that a positive change in price level is called inflation but a negative change is called deflation, so there is no such thing as &quot;negative inflation&quot;.) In theory, it is a highly undesirable phenomenon that can lead to a downwards spiral of economic activity. It would reduce consumer and business spending, as people expect prices to drop further, leading to decreased economic activity, lower wages, and higher unemployment. And these things would lead to more deflation...</p>

CC BY-SA 4.0
2024-11-04T13:58:59.920Z
thank you for your answer! So just to clarify, inflation CAN be negative? The graphs I made are correct?
stats_noob
CC BY-SA 4.0
2024-11-04T14:13:03.070Z
@stats_noob, inflation can be negative. I cannot guarantee your graphs are correct, but they are not technically impossible.
Richard Hardy
CC BY-SA 4.0
2024-11-04T14:45:32.070Z
+1, I would just point out minor technicality. Technically, deflation is not negative inflation. The correct name for the variable itself, is change in price level, and positive change in price level $\pi \geq 0$ is inflation, whereas negative change in price level $\pi<0$ deflation. So when $\pi$ is below zero it cannot be called inflation to begin with. I know colloquially people often say it as you do so I do not think its an issue with answer, I just wanted to add this little caveat
1muflon1
CC BY-SA 4.0
2024-11-04T16:06:07.127Z
While your graphs may tell you that inflation was very briefly "negative," the results may also be an anomaly of measurement. Recall that, for a while, nothing was normal because of COVID-19.
Phil Freedenberg
CC BY-SA 4.0
2024-11-04T18:51:21.487Z
The theory that inflation always leads to more economic downturn stems from Keynesian economics.
If you look up Austrian economics you will find out, that reduced prices allow you to live more cheaply and buy more goods for the same price, which moves hardware from inefficient firms to the new better ones.
very big cat
CC BY-SA 4.0
2024-11-04T20:12:45.077Z
@verybigcat, I could have been more specific when I wrote *In theory*. This is the theory one gets in introductory and intermediate courses. On an advanced level there is room for heterodox approaches with different implications, as you example illustrates.
Richard Hardy
CC BY-SA 4.0
2024-11-05T09:27:52.530Z
@CriticizingSEisbannable Can you point to any historic moment with deflation with economic growth?

There are a lot of theoretical models that can support almost anything. But reality is harder. 

And I do not mean just one price going down but the whole average of prices in a free market society.  (prices going down due to subsidies won't work)
borjab
CC BY-SA 4.0
2024-11-05T11:51:14.690Z
@1muflon1: Considering deflation as negative inflation is certainly not “technically wrong” — it’s very standard in plenty of technical contexts, e.g. the mathematical models used in economics.  Of course, this is context-dependent — if not otherwise stated, *inflation* is often clearly used to mean the positive sense — but as with other such terms (*growth*, *progress*, *magnification*, etc), it is very standard and scientifically useful to allow it to cover the negative version as well.
Peter LeFanu Lumsdaine
CC BY-SA 4.0
2024-11-05T11:58:03.363Z
@PeterLeFanuLumsdaine I did explain that colloquially it is used this way. And it is true that this way can be also found in technical texts nowadays, but the original technical meaning is as I described.
1muflon1
CC BY-SA 4.0
2024-11-05T12:16:02.893Z
Inflation is a rising CPI, deflation is a decreasing CPI, _stagflation_ is a CPI that does not move significantly over time.
bbaassssiiee
CC BY-SA 4.0
2024-11-05T14:43:21.613Z
@Criticizing: There are many suggestions that prolonged price deflation may be harmful: Japan often experienced it from 1995 to 2021, at a time of very low economic growth.  It forces high real interest rates (unless those too can go negative), and disrupts the labour market as wages and salaries are sticky, i.e. difficult to reduce to reflect falling prices.
Henry
CC BY-SA 4.0
2024-11-05T14:48:50.477Z
@bbaassssiiee I have seen *[stagflation](https://en.wikipedia.org/wiki/Stagflation)* used to mean high inflation combined with low growth (a stagnant economy) and high unemployment.
Henry
CC BY-SA 4.0
2024-11-05T15:02:06.820Z
Isn't it a half-myth that deflation automatically leads to soddom-and-gomorra chaos and implosion in a downwards spiral? Inflation usually also has a stop and is not always bad. If we'd normalize deflation couldn't it be it stabilizes in some occasions? I mean every natural system has ups and down, I believe it to be unnatural that economy only can go up because down is bad and I believe it is just as a marketing trick, to say deflation automatically leads to a full stop of consumption and a collapse of the economy. Realistically consuption can't be stopped in hope for lower prices forever.
Canelo Digital
CC BY-SA 4.0
2024-11-05T17:47:04.750Z
@Criticizing: [Indeed not](https://xkcd.com/552/), but there may be a reinforcing effect and Central Banks target small positive inflation because it leads to greater economic  flexibility (including, when appropriate, negative real interest rates which translate to positive nominal interest rates).
Henry
CC BY-SA 4.0
2024-11-06T08:23:03.940Z
@Criticizing Even apart from the recent Japan example, I think it is generally accepted that the central bank deflationary response to the 1930s Great Depression made things worse: their self-imposed targets then to preserve the value of money were wrong and it was inflationary policies by governments (including leaving the gold standard) which started to turn things round.
Henry
CC BY-SA 4.0
2024-11-06T22:46:20.933Z
@Henry Wasn't the ["Cross of Gold"](https://en.wikipedia.org/wiki/Cross_of_Gold_speech) speech all about deflation? Anyone who has a mortgage or any significant debt should be able to see quite clearly that deflation is a really difficult 'cross' to bear, if they really understand what it means: your payments (principal and interest) become more and more expensive over time.
JimmyJames
CC BY-SA 4.0
2024-11-06T22:48:26.763Z
@CriticizingSEisbannable Deflation is only good for people who are lenders. Maybe that's you and I'm fine with that; good for you. For the rest of us, not good.
JimmyJames
CC BY-SA 4.0
2024-11-07T08:44:50.400Z
@JimmyJames - Inflation is definitely more harmful the lower you are on the borrowing ladder. Or consumption ladder. The more you have to spend on said consumption, the more you are harmed by inflation, because the correction in the form of increased income is delayed by 9-18 months, depending on situation. Banks, OTOH, gain most. But logically, if the deflation is the inverse of inflation, then your statement cannot be - logically - true for both inflation and deflation. So, you are wrong: deflation is definitely good for consumers, with banks being hit most. Cry me a river.
AcePL
CC BY-SA 4.0
2024-11-07T15:25:25.523Z
@AcePL Banks suffer from deflation?  That makes no sense and is completely ahistorical.
JimmyJames
CC BY-SA 4.0
2024-11-07T16:27:12.473Z
@JimmyJames - think about it: what effect deflation has on loans and debt? Why governments prefer inflation to deflation? What is the first and most important thing that happens during deflation? Answers are, respectively: the real value of debt increases and loans are harder to repay, making it **the** *bank problem*. Obviously. Same applies to government except for scale, which makes banks even more exposed to huge risk. Last but not least: consumers will tend to pay for consumption with cash instead of credit, wiping out the juiciest business for banks in inflationary economy.
AcePL
CC BY-SA 4.0
2024-11-07T16:59:16.807Z
@AcePL So why have banks historically opposed things like moving to the bi-metal standard? If you are a running a business/farm, and your income keeps doing down in nominal terms, the fact that default is much more likely isn't just a bank problem. It's a problem for the farm/company, its employees, and customers. And creditors can do things like foreclose on valuable assets such as property.
JimmyJames
CC BY-SA 4.0
2024-11-08T07:38:28.770Z
@JimmyJames This is all true, unless whole economy responds to the deflation rationally (by "rationally" ABCT means "accordingly to real life signals, without external signals like FED rates, minimum wage etc.) Farms are a bit of a special case, because they are affected by a range of external factors, but companies are accustomed to that. I know, I run a business. Also, remember that normal state is mild  (that is: close to 0%) - if any - deflation, not inflation, so rest assured, it can be planned and accounted for. Banks, OTOH, need to change whole model to earn profit - take more risks.
AcePL
CC BY-SA 4.0
2024-11-08T15:34:03.857Z
@AcePL I think we are roughly on the same page. There are various reasons for deflation as well and I was mainly thinking of a constrained money supply. My general belief is that keeping the money supply stable with respect to economic activity is optimal. But of course, that's very difficult to do in practice and erroring slightly on the side of inflation 'lubricates' the system. In any event, this discussion led me to [this paper](https://www.bis.org/publ/qtrpdf/r_qt1503e.pdf) which is relevant, and I think informative.
JimmyJames
CC BY-SA 4.0
2024-11-04T07:19:50.437Z
2024-11-04T17:04:34.997Z
2024-11-04T17:04:34.997Z
Richard Hardy
<p>As the other answer correctly points out, <em>negative inflation</em> is called <em>deflation</em>. Both terms can be used - which one is more common depends on the research community, subfield of economics, country, etc. This is not unlike <em>acceleration</em> in physis - although technically <em>negative acceleration</em> is called <em>deceleration</em>, this term is hardly ever used.</p>
<p>However, I would adopt a more nuanced approach to characterizing <em>deflation</em> as a negative phenomenon. Whether it is negative or positive depends on the particular circumstances, the level of inflation/deflation, and the specific economic group.</p>
<p>Inflation has been historically seen (and used) as a way of lowering wages, without provoking too much social protest. Indeed, job market, like any market, is most efficient at equilibrium between the supply of labor and the demand for it. When supply (the number of unemployed) exceeds the demand, the way of equilibrating market is lowering the <em>price of labor</em>, i.e., the <em>wages</em>. However, there are manifest non-market forces in terms of trade unions, protests, strikes, angry voters, etc. which oppose such practices. <em>Inflation</em> allows lowering real wages, while keeping the nominal wages at the same level or even increasing them. Thus, it is good for the economy in general, and for those who would otherwise be unemployed... but it is less agreeable for those who have a stable job, but lose in terms of real salary. Various economic stimuli and government spending programs work in this way.</p>
<p>It is also known that high level of inflation do not result in significant increase of employment, and their negative effects are then outweighted by the decrease of the real wages (which can be viewed as the decrease in the purchasing power.) Phenomena of hyperinflation and stagflation belong to this category.</p>
<p><a href="https://en.wikipedia.org/wiki/Mutatis_mutandis" rel="nofollow noreferrer">Mutatis mutandis</a> the same arguments are applicable to <em>deflation</em>.</p>
<p>On the national level inflation/deflation is usually related to the weakening/strengthening of the national currency. Strong currency is good for tourists, who may afford cheaper vacations abroad. It is however detrimental to the exports, as the national goods become less competitive compared to those produced elsewhere, using cheaper labor.</p>

CC BY-SA 4.0
2024-11-05T09:01:25.530Z
2024-11-05T09:01:25.530Z
Roger V.
<p>No, inflation can't be negative, but CPI can decrease. Your models are possible.</p>
<p>First, we should define inflation. Probably most people would define it as an increase in prices. However, there is another older definition, which is that inflation is the upwards pressure on prices caused by expansion of the money supply. I've used the term 'upwards pressure' here because it is possible to have inflation even when prices are falling or when prices are stable. Let me explain.</p>
<p>Assuming a market economy with a fixed money supply, we should expect falling prices. In fact, this was observed during the late 19th century in America, under the hard gold standard of the epoch, despite a modestly increasing money supply. The reason why prices tend to fall under such a system is because of increased production. Let's assume a natural falling rate of prices due to increased production of 4%.</p>
<p>Now let's increase the money supply such that it causes prices to increase 2%. You would have over all falling prices of 2% but you would still have inflation. Inflation caused the prices to be 2% higher than they otherwise would be, even though prices fell and most people would say we had 2% deflation.</p>
<p>It is also important to understand that price increases caused by expanding the money supply (inflation) can manifest itself in prices other than those captured by CPI. For example, during the 1920s in America CPI was more or less level, while other prices increased, such as the Snyder index of wholesale prices. More speculatively, I would like to suggest that during the recent era of low interest rates in Canada a lot of that inflation went into home prices.</p>
<p>You see, inflation doesn't hit all sectors of the economy or all prices evenly. Instead as the new money works its way into the economy it increases the prices it touches. This is known as The Cantillon Effect, after a great French economist, Richard Cantillon. His essai sur la nature de comerce en general was perhaps the first complete economic treatise, predating Wealth of Nations (and being quite a bit more accurate).</p>
<p>BTW, falling prices aren't something to be afraid of, as many economists suggest. This isn't deflation, which is what would happen if you decreased the money supply. Most people aren't going to put off consumer purchases for a whole year just because stuff will be 1% or 2% cheaper then. And even if they did, that's perfectly fine. People saving money does not hurt the economy, that is a Keynesian myth. Actually savings are foundational to economic growth. That's where capital accumulation comes from. That's how people get the money to start new businesses.</p>

CC BY-SA 4.0
2024-11-07T08:18:09.027Z
Upvote for mostly correct definitions (older is the correct one, new is the misinformation). But you're wrong on the source of the inflation/deflation. Within the definition you chose (the older one) it is not possible for market to cause system-wide inflation/deflation (with one possible exception). This "privilege" is reserved for government body manipulating currency (not money, another error). The one possible exception is private banks creating - literally - fiat money out of the thin air by issuing loans with reserve requirements less than 100%. But it still requires government action.
AcePL
CC BY-SA 4.0
2024-11-07T08:37:14.400Z
2/2... But I guess the corollary can be true: increase in currency supply does not have to cause system-wide price increases. It all depends on the economy size and currency supply increase size. For example, US inflation was for a quite a while not manifesting outside housing market, beacuse that was where the beneficiaries of the inflation (increased supply) chose to allocate their windfalls.
AcePL
CC BY-SA 4.0
2024-11-07T06:56:54.817Z
2024-11-07T06:56:54.817Z
Zak Young
<p>Inflation is measured as a percent - that is, a ratio. It is always positive. What matters is whether that ratio is greater or less than <span class="math-container">$1$</span>. For example, <span class="math-container">$2\%$</span> inflation corresponds to multiplying prices by a factor of <span class="math-container">$1.02$</span>.</p>
<p>What you call &quot;negative inflation&quot; is (as the other answers note)  called &quot;deflation&quot;. It corresonds to a factor less than <span class="math-container">$1$</span>. So <span class="math-container">$2\%$</span> deflation means new prices are <span class="math-container">$1-0.02 = 0.98$</span> times old prices.</p>
<p>Your code correctly calculates these ratios. During covid some of them were in fact less than <span class="math-container">$1$</span>.</p>
<p>(You have to be careful combining inflation rates. A <span class="math-container">$50 \% $</span> inflation followed by <span class="math-container">$50\%$</span> deflation multiplies prices by <span class="math-container">$1.5 \times 0.5 = 0.75$</span>, which is a net <span class="math-container">$25\%$</span> deflation.)</p>

CC BY-SA 4.0
2024-11-05T18:39:51.017Z
2024-11-05T18:47:20.670Z
2024-11-05T18:47:20.670Z
Ethan Bolker
<p>I took some public data (<a href="https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000401" rel="nofollow noreferrer">https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000401</a>) and (using R programming language) made a visual for the CPI (Consumer Price Index) of each province in Canada over time</p>
<p>I wanted to convert these numbers into the inflation percentage that we hear on the news. Doing some reading, I read that the inflation numbers we hear on the news are the year-over-year % different in CPI for the same month (e.g. % change in CPI in march 2020 vs the CPI in 2019).</p>
<p><strong>My Question:</strong> It seems that during the COVID period (i.e. March 2020), the inflation was <em>negative</em>? Is this technically correct? Or have I made a huge mistake doing this?</p>
<p>Thanks!</p>

CC BY-SA 4.0
2024-11-04T16:18:25.933Z
The data you have is an aggregate for a basket of goods. A decrease around the time of the covid outbreak might reflect the drop in oil prices: https://www.eia.gov/dnav/pet/hist/RWTCD.htm Other areas hit by covid were travel, restaurants and tourism (hospitality).
Buck Thorn
CC BY-SA 4.0
2024-11-05T19:16:22.717Z
See also [Japan](https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=JP), which has dealt with it since 1990.
user71659
<inflation>
Can inflation be negative?
stats_noob
# Can inflation be negative?

(Asked by: username_0 on 2024-11-04)

I took some public data (<https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000401>) and (using R programming language) made a visual for the CPI (Consumer Price Index) of each province in Canada over time

I wanted to convert these numbers into the inflation percentage that we hear on the news. Doing some reading, I read that the inflation numbers we hear on the news are the year-over-year % different in CPI for the same month (e.g. % change in CPI in march 2020 vs the CPI in 2019).

**My Question:** It seems that during the COVID period (i.e. March 2020), the inflation was *negative*? Is this technically correct? Or have I made a huge mistake doing this?

Thanks!

**Tags:** inflation
> **Comments:**
> **username_1**: The data you have is an aggregate for a basket of goods. A decrease around the time of the covid outbreak might reflect the drop in oil prices: https://www.eia.gov/dnav/pet/hist/RWTCD.htm Other areas hit by covid were travel, restaurants and tourism (hospitality).  
> **username_2**: See also [Japan](https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=JP), which has dealt with it since 1990.  

---

## 4 answers

### Answer by username_16 on 2024-11-05. Score: 3 | Accepted answer

Inflation is measured as a percent - that is, a ratio. It is always positive. What matters is whether that ratio is greater or less than $1$. For example, $2\%$ inflation corresponds to multiplying prices by a factor of $1.02$.

What you call "negative inflation" is (as the other answers note) called "deflation". It corresonds to a factor less than $1$. So $2\%$ deflation means new prices are $1-0.02 = 0.98$ times old prices.

Your code correctly calculates these ratios. During covid some of them were in fact less than $1$.

(You have to be careful combining inflation rates. A $50 \% $ inflation followed by $50\%$ deflation multiplies prices by $1.5 \times 0.5 = 0.75$, which is a net $25\%$ deflation.)


---

### Answer by username_3 on 2024-11-04. Score: 20

Yes, inflation can be negative; it is called deflation. (Regarding terminology, @1muflon1 points out that a positive change in price level is called inflation but a negative change is called deflation, so there is no such thing as "negative inflation".) In theory, it is a highly undesirable phenomenon that can lead to a downwards spiral of economic activity. It would reduce consumer and business spending, as people expect prices to drop further, leading to decreased economic activity, lower wages, and higher unemployment. And these things would lead to more deflation...

> **Comments:**
> **username_0**: thank you for your answer! So just to clarify, inflation CAN be negative? The graphs I made are correct?  
> **username_3**: @stats_noob, inflation can be negative. I cannot guarantee your graphs are correct, but they are not technically impossible.  
> **username_4**: +1, I would just point out minor technicality. Technically, deflation is not negative inflation. The correct name for the variable itself, is change in price level, and positive change in price level $\pi \geq 0$ is inflation, whereas negative change in price level $\pi<0$ deflation. So when $\pi$ is below zero it cannot be called inflation to begin with. I know colloquially people often say it as you do so I do not think its an issue with answer, I just wanted to add this little caveat  
> **username_5**: While your graphs may tell you that inflation was very briefly "negative," the results may also be an anomaly of measurement. Recall that, for a while, nothing was normal because of COVID-19.  
> **username_6**: The theory that inflation always leads to more economic downturn stems from Keynesian economics. If you look up Austrian economics you will find out, that reduced prices allow you to live more cheaply and buy more goods for the same price, which moves hardware from inefficient firms to the new better ones.  
> **username_3**: @verybigcat, I could have been more specific when I wrote *In theory*. This is the theory one gets in introductory and intermediate courses. On an advanced level there is room for heterodox approaches with different implications, as you example illustrates.  
> **username_7**: @CriticizingSEisbannable Can you point to any historic moment with deflation with economic growth?  There are a lot of theoretical models that can support almost anything. But reality is harder.   And I do not mean just one price going down but the whole average of prices in a free market society.  (prices going down due to subsidies won't work)  
> **username_8**: @1muflon1: Considering deflation as negative inflation is certainly not “technically wrong” — it’s very standard in plenty of technical contexts, e.g. the mathematical models used in economics.  Of course, this is context-dependent — if not otherwise stated, *inflation* is often clearly used to mean the positive sense — but as with other such terms (*growth*, *progress*, *magnification*, etc), it is very standard and scientifically useful to allow it to cover the negative version as well.  
> **username_4**: @PeterLeFanuLumsdaine I did explain that colloquially it is used this way. And it is true that this way can be also found in technical texts nowadays, but the original technical meaning is as I described.  
> **username_9**: Inflation is a rising CPI, deflation is a decreasing CPI, _stagflation_ is a CPI that does not move significantly over time.  
> **username_10**: @Criticizing: There are many suggestions that prolonged price deflation may be harmful: Japan often experienced it from 1995 to 2021, at a time of very low economic growth.  It forces high real interest rates (unless those too can go negative), and disrupts the labour market as wages and salaries are sticky, i.e. difficult to reduce to reflect falling prices.  
> **username_10**: @bbaassssiiee I have seen *[stagflation](https://en.wikipedia.org/wiki/Stagflation)* used to mean high inflation combined with low growth (a stagnant economy) and high unemployment.  
> **username_11**: Isn't it a half-myth that deflation automatically leads to soddom-and-gomorra chaos and implosion in a downwards spiral? Inflation usually also has a stop and is not always bad. If we'd normalize deflation couldn't it be it stabilizes in some occasions? I mean every natural system has ups and down, I believe it to be unnatural that economy only can go up because down is bad and I believe it is just as a marketing trick, to say deflation automatically leads to a full stop of consumption and a collapse of the economy. Realistically consuption can't be stopped in hope for lower prices forever.  
> **username_10**: @Criticizing: [Indeed not](https://xkcd.com/552/), but there may be a reinforcing effect and Central Banks target small positive inflation because it leads to greater economic  flexibility (including, when appropriate, negative real interest rates which translate to positive nominal interest rates).  
> **username_10**: @Criticizing Even apart from the recent Japan example, I think it is generally accepted that the central bank deflationary response to the 1930s Great Depression made things worse: their self-imposed targets then to preserve the value of money were wrong and it was inflationary policies by governments (including leaving the gold standard) which started to turn things round.  
> **username_12**: @Henry Wasn't the ["Cross of Gold"](https://en.wikipedia.org/wiki/Cross_of_Gold_speech) speech all about deflation? Anyone who has a mortgage or any significant debt should be able to see quite clearly that deflation is a really difficult 'cross' to bear, if they really understand what it means: your payments (principal and interest) become more and more expensive over time.  
> **username_12**: @CriticizingSEisbannable Deflation is only good for people who are lenders. Maybe that's you and I'm fine with that; good for you. For the rest of us, not good.  
> **username_13**: @JimmyJames - Inflation is definitely more harmful the lower you are on the borrowing ladder. Or consumption ladder. The more you have to spend on said consumption, the more you are harmed by inflation, because the correction in the form of increased income is delayed by 9-18 months, depending on situation. Banks, OTOH, gain most. But logically, if the deflation is the inverse of inflation, then your statement cannot be - logically - true for both inflation and deflation. So, you are wrong: deflation is definitely good for consumers, with banks being hit most. Cry me a river.  
> **username_12**: @AcePL Banks suffer from deflation?  That makes no sense and is completely ahistorical.  
> **username_13**: @JimmyJames - think about it: what effect deflation has on loans and debt? Why governments prefer inflation to deflation? What is the first and most important thing that happens during deflation? Answers are, respectively: the real value of debt increases and loans are harder to repay, making it **the** *bank problem*. Obviously. Same applies to government except for scale, which makes banks even more exposed to huge risk. Last but not least: consumers will tend to pay for consumption with cash instead of credit, wiping out the juiciest business for banks in inflationary economy.  
> **username_12**: @AcePL So why have banks historically opposed things like moving to the bi-metal standard? If you are a running a business/farm, and your income keeps doing down in nominal terms, the fact that default is much more likely isn't just a bank problem. It's a problem for the farm/company, its employees, and customers. And creditors can do things like foreclose on valuable assets such as property.  
> **username_13**: @JimmyJames This is all true, unless whole economy responds to the deflation rationally (by "rationally" ABCT means "accordingly to real life signals, without external signals like FED rates, minimum wage etc.) Farms are a bit of a special case, because they are affected by a range of external factors, but companies are accustomed to that. I know, I run a business. Also, remember that normal state is mild  (that is: close to 0%) - if any - deflation, not inflation, so rest assured, it can be planned and accounted for. Banks, OTOH, need to change whole model to earn profit - take more risks.  
> **username_12**: @AcePL I think we are roughly on the same page. There are various reasons for deflation as well and I was mainly thinking of a constrained money supply. My general belief is that keeping the money supply stable with respect to economic activity is optimal. But of course, that's very difficult to do in practice and erroring slightly on the side of inflation 'lubricates' the system. In any event, this discussion led me to [this paper](https://www.bis.org/publ/qtrpdf/r_qt1503e.pdf) which is relevant, and I think informative.  

---

### Answer by username_14 on 2024-11-05. Score: 4

As the other answer correctly points out, *negative inflation* is called *deflation*. Both terms can be used - which one is more common depends on the research community, subfield of economics, country, etc. This is not unlike *acceleration* in physis - although technically *negative acceleration* is called *deceleration*, this term is hardly ever used.

However, I would adopt a more nuanced approach to characterizing *deflation* as a negative phenomenon. Whether it is negative or positive depends on the particular circumstances, the level of inflation/deflation, and the specific economic group.

Inflation has been historically seen (and used) as a way of lowering wages, without provoking too much social protest. Indeed, job market, like any market, is most efficient at equilibrium between the supply of labor and the demand for it. When supply (the number of unemployed) exceeds the demand, the way of equilibrating market is lowering the *price of labor*, i.e., the *wages*. However, there are manifest non-market forces in terms of trade unions, protests, strikes, angry voters, etc. which oppose such practices. *Inflation* allows lowering real wages, while keeping the nominal wages at the same level or even increasing them. Thus, it is good for the economy in general, and for those who would otherwise be unemployed... but it is less agreeable for those who have a stable job, but lose in terms of real salary. Various economic stimuli and government spending programs work in this way.

It is also known that high level of inflation do not result in significant increase of employment, and their negative effects are then outweighted by the decrease of the real wages (which can be viewed as the decrease in the purchasing power.) Phenomena of hyperinflation and stagflation belong to this category.

[Mutatis mutandis](https://en.wikipedia.org/wiki/Mutatis_mutandis) the same arguments are applicable to *deflation*.

On the national level inflation/deflation is usually related to the weakening/strengthening of the national currency. Strong currency is good for tourists, who may afford cheaper vacations abroad. It is however detrimental to the exports, as the national goods become less competitive compared to those produced elsewhere, using cheaper labor.


---

### Answer by username_15 on 2024-11-07. Score: 1

No, inflation can't be negative, but CPI can decrease. Your models are possible.

First, we should define inflation. Probably most people would define it as an increase in prices. However, there is another older definition, which is that inflation is the upwards pressure on prices caused by expansion of the money supply. I've used the term 'upwards pressure' here because it is possible to have inflation even when prices are falling or when prices are stable. Let me explain.

Assuming a market economy with a fixed money supply, we should expect falling prices. In fact, this was observed during the late 19th century in America, under the hard gold standard of the epoch, despite a modestly increasing money supply. The reason why prices tend to fall under such a system is because of increased production. Let's assume a natural falling rate of prices due to increased production of 4%.

Now let's increase the money supply such that it causes prices to increase 2%. You would have over all falling prices of 2% but you would still have inflation. Inflation caused the prices to be 2% higher than they otherwise would be, even though prices fell and most people would say we had 2% deflation.

It is also important to understand that price increases caused by expanding the money supply (inflation) can manifest itself in prices other than those captured by CPI. For example, during the 1920s in America CPI was more or less level, while other prices increased, such as the Snyder index of wholesale prices. More speculatively, I would like to suggest that during the recent era of low interest rates in Canada a lot of that inflation went into home prices.

You see, inflation doesn't hit all sectors of the economy or all prices evenly. Instead as the new money works its way into the economy it increases the prices it touches. This is known as The Cantillon Effect, after a great French economist, Richard Cantillon. His essai sur la nature de comerce en general was perhaps the first complete economic treatise, predating Wealth of Nations (and being quite a bit more accurate).

BTW, falling prices aren't something to be afraid of, as many economists suggest. This isn't deflation, which is what would happen if you decreased the money supply. Most people aren't going to put off consumer purchases for a whole year just because stuff will be 1% or 2% cheaper then. And even if they did, that's perfectly fine. People saving money does not hurt the economy, that is a Keynesian myth. Actually savings are foundational to economic growth. That's where capital accumulation comes from. That's how people get the money to start new businesses.

> **Comments:**
> **username_13**: Upvote for mostly correct definitions (older is the correct one, new is the misinformation). But you're wrong on the source of the inflation/deflation. Within the definition you chose (the older one) it is not possible for market to cause system-wide inflation/deflation (with one possible exception). This "privilege" is reserved for government body manipulating currency (not money, another error). The one possible exception is private banks creating - literally - fiat money out of the thin air by issuing loans with reserve requirements less than 100%. But it still requires government action.  
> **username_13**: 2/2... But I guess the corollary can be true: increase in currency supply does not have to cause system-wide price increases. It all depends on the economy size and currency supply increase size. For example, US inflation was for a quite a while not manifesting outside housing market, beacuse that was where the beneficiaries of the inflation (increased supply) chose to allocate their windfalls.  

---

