EconLog

A Deflation Primer, 2003-01-22

From 'Jane Galt':

Scott Rosenberg wonders if the deflation we may be facing is due to cheap Chinese production.

Umm. No.

... we've been importing from China, and before that Japan, for decades -- no deflation. Finally, trade is a relatively small part of the US economy.

The kind of deflation that economists worry about is the kind that is caused by a mismatch between the supply of money and the demand for it. Specifically, people want to hold more money and spend less, so you need more money in circulation.

To paraphrase her icon, Milton Friedman, deflation is everywhere and always a monetary phenomenon.

Discussion Question. Even if competition from Chinese producers were significant, why would we expect that it would affect the price level but not the rate of inflation?