Top economists play down fears of a harmful deflationary spiral

 
Chris Papadopoullos
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CONCERNS over a deflationary spiral are overblown, a major international financial organisation said yesterday.

Many economists and policy makers have raised concerns that falling prices could lead consumers to delay purchases, reducing spend­ing and cause further falls in prices. “There is not much evidence so far that deflation has been associated with debt deflation spirals, where lower prices increase the debt burden, which in turn depresses economic activity,” said BIS economist Hyun Shin.

“In the popular debate, the term deflation conjures up images of the Great Depression in the 1930s, with large output drops and mass unemployment. But the historical evidence suggests that the Great Depression was the exception rather than the rule.

“Deflations – defined simply as declines in the price of goods and services – have been quite common in the sample period from 1870. The 38 economies examined in the study have spent roughly 18 per cent of the time in deflation.

“That said, deflations became far less common and more short-lived after the Second World War.”

However, the researchers did find that episodes of falling property prices are associated with much larger drops in output.