Why Central Banks Like Inflation More Than Deflation

In a world that’s panicked about inflation, it wouldn’t be a surprise if you saw deflation as a welcome alternative. However, a decrease in prices isn’t all rainbows and butterflies. It can also have severely negative consequences for the economy.

What is Deflation?

Deflation is a decline in the general price levels of goods and services in the economy. This means that prices are declining overall, which would show as a negative number in inflation data such as the Consumer Price Index.

If prices in the economy are declining, that means the currency’s value in the economy strengthens, increasing purchasing power, real incomes, and wealth that could lead to more spending and help boost economic growth.

So, if deflation can help economic growth, why do the central banks prefer inflation instead?

The Problem With Deflation

Although I mentioned it could lead to an increase in economic growth, it could have the opposite effect.