This week's slightly higher-than-expected inflation report sparked a tantrum on Wall Street, with investors bummed that those sweet, sweet rate cuts are going to be delayed.
Investors and everyday Americans are certainly fatigued by high prices, especially while interest rates remain above a two-decade high.
But sometimes it helps to look across the globe to gain some perspective about our economic woes. High prices are painful, no doubt.
The opposite problem, however, is worse.
See here: In China, consumer prices are falling at their fastest rate in 15 years. And while a little deflation might sound nice to an American (especially one trying to buy a house or car right now), that is a far riskier state to be in than an inflationary one.
Rapid deflation and inflation can both create a psychological problem on a mass scale. When consumers expect prices to keep going up, they buy stuff sooner to avoid paying more in the future, which creates more demand, and pushes prices higher.
The same goes for deflation, my colleague Elisabeth Buchwald writes.
When people expect lower prices in the future, they have little incentive to make purchases right now. Less demand leads to lower prices. And on and on.
Spiraling up or down, there's often bad news at the end.
China's consumer prices slipped into deflationary territory in July, and the downward pressure hasn't let up. It's taken a toll on stocks, making China the worst-performing equity market in the world last year. Corporate profits are shrinking and consumer confidence is weak.
In response, the central government has vowed more "proactive" policies to stimulate demand, which some economists believe could be sufficient to break the economy out of its malaise.
When inflation can be good
True story: Back in 2021, I wrote an article that made some readers very angry. The headline read: "Why inflation can actually be good for everyday Americans and bad for rich people."
The gist was that inflation helps people who have fixed-rate debt, like a mortgage. Your home increases in value but your monthly payment is steady, and meanwhile wages are also going up.
It's not that controversial a statement, but the anger was rooted in the way higher prices feel in the moment. You feel the sting of your grocery bill every week; the dwindling burden of debt doesn't carry the same punch.
To be clear: The rapid inflation that we have experienced over the past few years is not what central banks want. But the disease of inflation is easier to treat than the disease of deflation.
Central banks around the world, including the Fed, target a 2% annual rate of inflation, not zero. That's the widely agreed upon sweet spot for an economy that's growing nice and steady.
Interest rates can only be cut so far. When deflation takes root, central banks' most powerful tool — interest rates — are less effective.
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