Inflation is mainly measured by the Consumer Price Index or the Retail Price Index which is...
... middle of paper ...
...it allows for some real adjustments in the labor markets. Nominal wages are very rigid downwards and it will facilitate the real adjustment of companies’s costs which will result in less unemployment. Furthermore, a low but positive inflation rate allows for negative interest rates. If nominal interest rates have reached their zero bound, there is no more margin for traditional monetary policy. Some inflation will result in negative real interest rates which may encourage investment and consumption.
Deflation has a reputation for being something bad since the beginning of the twentieth century thanks to a number of severe deflationary downturns like the great depression in the 30’s in particular. Until then it was quite common for prices to fall gradually and it meant nothing else than goods and services were getting cheaper respectively produced for less resources.
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