Deflation Would Be a Crippling Side Effect of the Pandemic

If you’re old enough to remember the 1970s in the U.S., or if you’ve ever lived in a country with runaway prices, you know the corrosive impact of high inflation and that awful feeling that your pay will never quite keep pace with the rising cost of everything else. Against that, it sounds odd to say inflation can ever be too low. But many economists had begun to worry about just that in recent years. And that was before the coronavirus pandemic.

With demand for many goods and services wiped out by efforts to contain the deadly outbreak, there’s a new concern that the economy’s sudden and severe stumble could lead to a dangerous phenomenon known as deflation, when overall prices drop. “The risk is definitely toward deflation,” says Julia Coronado, president of Macropolicy Perspectives LLC. “We’re not quite forecasting it, but that’s where the risk lies, and that would contribute to rising business failures in a negative feedback loop.”