While I was at the White House, I asked Jared Bernstein, chair of the U.S. Council of Economic Advisers, to explain why. We don’t want to see a broad deflation of the price level across the economy, he says, “because the only way that happens is if the bottom falls out.”
Wondering what that looks like? Unfortunately, we already know.
During the Great Depression, the unemployment rate passed 25%. The consumer price index decreased by over 25% between 1929 and 1933. In 1932, the rate of deflation in the U.S. reached 10%.
In particular, that deflation took a toll on Wisconsin farmers, who saw the average price for milk go from $2.01 to $0.89 in the span of three years. Cash-strapped and frustrated with the government, they staged milk strikes, attempting to withhold dairy from the public until prices (and therefore, their payouts) were raised. The Wisconsin Milk Strikes of 1933 got so tense that, at one point, strikers attacked dairy trucks and literally dumped out their milk on the side of the road.
And that’s just one example. If the U.S. saw significant deflation today, the effects could be far-reaching. According to one theory, people could start waiting to make purchases in anticipation that they’ll have greater purchasing power in the future, ultimately leading to sluggish economic growth and trapping the nation in a deflationary loop.
“Even though we might want lower prices, we verbally say we want deflation, our wages and earnings are tied to how much things cost,” Wooten says. “And so if we really did see an economy where we got deflation — so, negative inflation rates — the corollary to that is we would also see our wages and our salaries go down.”
Although widespread deflation would be rough, Bernstein clarifies that he’d like to see *some* deflation in specific goods and services that saw their prices spike in the months/years following the pandemic. Think: airfare, used cars and eggs.
Speaking generally, though, I shouldn't be crossing my fingers for no inflation at all. He says some inflation is good because it’s characteristic of a healthy economy.
“It's sort of like saying, ‘I don't want to have a fever of 110 [degrees].’ And then someone might say, ‘Well, gee, would you rather have a fever of 50?’” Bernstein says. “‘No: 98.6 is some heat, but it's the level of heat that I'm comfortable with.’"
He adds: “An economy that's generating some heat should have some inflation.”
Home insurance costs increased 21% between 2022 and 2023, but that’s still no reason to go “bare” (you know, skip coverage). Why? Well, opting out might actually prompt your landlord to stick you with a pricey policy with less-than-adequate protection. Trust us — saving a few bucks now isn’t worth risking budget-busting incidents down the road.
