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3. i'm not sure if you're asking why prices rarely go down ever, or why we're currently experiencing stubborn inflation
Thu Mar 20, 2025, 10:21 AM
Mar 20

if you're asking why the long-term pattern includes periods of very low inflation and moderate or high inflation but rarely and deflation, well, that's basically because deflation is worse than inflation for the economy and for most people, so policy makers try to avoid it like the plague.

inflation is obviously not ideal, but low inflation isn't horrible, and it has some positive effects -- it encourages people to spend money before it becomes less valuable, which helps keep the economy moving. this is basically why the fed targets 2% inflation, rather than 0%. plus, we basically know how to tame inflation. jacking up interest rates isn't pretty and can lead to a recession, but once inflation expectations are under control, the economy can resume normal growth with price stability.

deflation is more problematic. once people get the idea that prices are generally going down, they have an incentive to save and save and defer spending. this reduces demand, causing prices to continue to fall, creating a vicious cycle. And unlike inflation, it's harder for policy makers to solve. one might think lowering interest rates and increasing the money supply (the opposite of the inflation-fighting strategy) might work, but unfortunately, this doesn't usually have the desired effect. people just take the easier money and just continue to save rather than spend, which is what is needed to get prices back up.

*short*-term inflation is often followed by prices mostly coming back down, albeit slowly and rarely fully. but inflation that lasts more than a few months is usually followed simply by a return to price stability. policy-makers don't want prices to come back down.

japan got themselves into a deflation trap around 1998, it took about 15 years to get out of it.


as to why we currently have inflation, there are a few lingering effects from the covid shocks, but a lot of it at this point has to do with things like continued consolidation in various industries, allowing trust/monopolistic effects due to decreased competition and a lack of real choices for consumers. that said, biden/powell had nearly ended inflation, but then donnie came along with his tariff nonsense, directly making prices go up, and screwed it back up again.

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