How the media are missing the point on deflation

Dean Baker of the Center for Economic and Policy Research writes about how the business media is misinterpreting the impact of deflation on the economy.

Baker writes, “This simple point often eludes people who write about the economy, as was the case with this Washington Post editorial on China’s economic problems. The piece correctly noted that China’s official data on GDP cannot be trusted, and then told readers:

“‘What’s worrisome is that China might already have entered a period of slowdown, even deflation — and the official figures might amount to a coverup.’

“A simple reminder here of what deflation means might be helpful. The price indices here and in China, are aggregated from measuring changes in tens of thousands of prices. When a country has a low positive inflation rate, it is almost certainly the case that thousands of prices are actually falling. It just means that the prices that are rising outweigh the ones that are falling in the index.

“But if it goes the other way, say the inflation rate falls from a positive 0.5 percent to a negative 0.5 percent, it means the prices that are falling in the index now outweigh the ones that are rising. But how can this be any sort of disaster?”

Read more here.