The Canadian Press - ONLINE EDITION

Why ultra-low inflation can hold back the job market and the economy

  • Print

Historically low inflation has taken hold across the developed world, from the United States to Europe to Japan.

Economists say super-low inflation has likely slowed growth in those regions, which is why the world's central banks would like prices to rise.

Last year, overall U.S. prices inched up just 1.1 per cent, according to the Federal Reserve's preferred gauge. Inflation has stayed below the Fed's 2 per cent target for two years. It's even lower in Japan and Europe.

So why is very low inflation bad for the economy? Isn't it helpful when prices stay low?

Not when they barely budge. Here are some reasons:

— When prices barely move, many people postpone purchases. Why rush, if the same price — or lower — will be available in six months? Collectively, these delays slow consumer spending, the economy's main fuel.

— Too-low inflation raises the prospect of deflation — a broad decline in prices, pay and the value of stocks, homes or other assets. Deflation can further restrain spending and even tip an economy into recession.

— Retailers engage in harmful price competition. Big chains such as Wal-Mart, Best Buy and Bed, Bath & Beyond, for example, fought a brutal price war during the past holiday shopping season. Thirty-three retail chains cut their profit estimates for the final months of 2013, according to RetailMetrics LLC..

— Low inflation leads many businesses to hoard cash. Higher inflation, by contrast, would erode the cash's value. So businesses would be more inclined to spend — to hire or buy equipment.

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Jim Flaherty remembered at visitation as irreplaceable

View more like this

Photo Store Gallery

  • Marc Gallant/Winnipeg Free Press. Local/Standup- BABY BISON. Fort Whyte Centre's newest mother gently nudges her 50 pound, female bull calf awake. Calf born yesterday. 25 now in herd. Four more calfs are expected over the next four weeks. It is the bison's second calf. June 7, 2002.
  • MIKE.DEAL@FREEPRESS.MB.CA 110621 - Tuesday, June 21, 2011 -  Doug Chorney, president Keystone Agricultural Producers flight over South Western Manitoba to check on the condition of farming fields. MIKE DEAL / WINNIPEG FREE PRESS
my2011poy

View More Gallery Photos

Poll

What are you most looking forward to this Easter weekend?

View Results

View Related Story

Ads by Google