The topic of deflation is one that I feel lacks recognition, especially since my analyses indicate that deflation is on the horizon and that many signs of "deflationary pressures" exist, some of which I wrote of in the post of June 10, "The Prospect Of Deflation." [note: to clarify, for purposes of this discussion, when I mention "deflation" I am referring to the CPI going below zero.]
Every so often I run across an article that seeks to explain why deflation would be a positive occurrence. Most of these arguments center around the idea that consumer's purchasing power would be increased, and that lower prices would stimulate demand.
While the idea of consumers receiving lower prices certainly sounds appealing - especially given the ongoing low-growth nature of aggregate wages and income - arguments espousing that deflation would be a positive occurrence inherently neglect to consider the overall economic environment that would accompany such deflation.
While one can find many past periods of deflation - both here and abroad - and draw various conclusions from such - I strongly believe that the most recent economic environments in which deflation occurred (post-1930) are those most analogous to our present situation. One can see these in the chart below (from Doug Short's long-term inflation updates):
In particular, my analyses indicates that the deflationary periods of the Great Depression, as well as the brief - but sharp - episode during the Financial Crisis - are the most relevant. Needless to say, in each of those two episodes, while consumers encountered lower prices, the overall economic environment was not beneficial. While consumers may have benefited from lower prices, they (in aggregate) concomitantly saw a raft of negative economic impacts, including lower wages, rising unemployment, and substantial "hits" to their net worth. Therefore, from an overall perspective, these deflationary environments were not beneficial in an overall sense.
Given the limited number of deflationary episodes that have been encountered in the U.S. post-1930, I believe it would be difficult to fully predict, from a behavioral standpoint, what impact a deflationary environment may have. The impact on businesses' revenues and profitability would likely (depending upon the extent of the deflation as well as other factors) be pronounced, as various calculations attest. While recent business surveys (such as that seen in my post titled "Business Expectations Concerning Price Changes And Unit Costs") don't appear to indicate that businesses expect oncoming deflationary conditions, whether businesses would foresee - and successfully adapt - to such deflationary conditions remains to be seen.
Also of note is various pernicious dynamics that would likely accompany deflation. While these, of course, would vary with the extent of deflation, many would be inimical to today's U.S. economic and financial structure.