bloomberg deflation-monster-has-arrived ). For years many skeptics have been lamenting that the inflation rates in the US and Europe are too low and that global economy could fall into a deflation spiral (sharp falling prices) which could cause a severe recession (nytimes businessinsider). New York Times blogger Krugman even used the analogy of a black hole, an astrophysical object whose gravitational field is so strong that no matter or energy that comes near it can escape. He wrote "when the economy crosses the black hole's event horizon: the point of no return, beyond which deflation feeds on itself. Prices fall in the face of excess capacity; businesses and individuals become reluctant to borrow, because falling prices raise the real burden of repayment; with spending sluggish, the economy becomes increasingly depressed, and prices fall all the faster" (nytimes).
Krugman` s claim was ill-founded. It may fit to astronomy but it has nothing to do with economics (mises ). People have been buying computers, smartphones and a lot of other things even that their prices have been falling all the time. Goods & services are bought for many reasons. Many prefer to have what they want now, rather than later (tomorrow we could be dead). In a Krugman world people would starve to death because they are waiting for even lower food prices. And you can postpone buying a new car, but your old vehicle will get less secure and the costs for repairing it will climb. People usually buy more when goods & services are getting cheaper because they are getting more affordable. When prices in general are dropping the value of cash rises, making cash holders richer. History shows that people spend more when their wealth is climbing (wealth effect).
It is not surprising that after WWII periods of negative inflation rates (falling general price levels) were short lived and were always followed by a return of (at least some) inflation. Since the 1990 the US core inflation rate (without food & gasoline) has been floating around 2% (blue line in the chart above advisor).
Stuff cheap, people expensive", says John Cochrane, an economist and Prof. at the University of Chicago (johnhcochrane). Above you can see a graph by the New York Times (nytimes) which shows a dichotomy: Services are getting more expensive and goods are getting cheaper ( I have no idea why in this graph television prices are falling more than 100%. This is a secret of the New York Times which is often at odds with economics and logic).
Prices for many industrial products have been falling for a long time thanks to the technological progress. Since the first industrial revolution in the late 18th century advances in manufacturing (automation) have been lifting efficiency of the producers which lead to shrinking costs. Today especially computers and other electronics cost just a fraction of what you had to pay some years ago.
Unfortunately rising rents and climbing cost of health care and other services are overcompensating the falling technology prices. And oil & gas prices are spiking again. It is time that Janet Yellen & her Federal Reserve colleagues deal with inflation again.