Hurts So Good: When Exactly Are Falling Prices Bad?

In a new commentary from Euro Pacific Capital, Peter Schiff debunks the double-speak mantra of central bankers that claims falling prices in one sector (like oil) are good for consumers, while falling prices across the board will stagnate an economy.

The sudden fall in the price of oil provides a unique opportunity to examine the widely held belief that deflation is economic poison. As many governments and central banks have vowed to fight deflation at all costs in 2015, the question could hardly be more significant.

While falling prices may strike the layman as cause for celebration, economists believe that it can kick off a nasty, and often inescapable, negative cycle, which many believe leads inevitably to a prolonged recession, or even a depression. However, these same economists acknowledge that falling energy prices may offer a stimulus, equivalent to an enormous “tax cut,” particularly for lower and middle income consumers for whom energy costs represent a major portion of disposable income. They suggest that the money consumers and businesses no longer spend on gasoline and heating oil could be spent on other goods and services thereby creating demand in other areas of the economy. Even Fed Chair Janet Yellen, a staunch advocate of the economic benefits of rising consumer prices, has extolled the benefits of falling oil prices.

After considering these competing tensions, most economists agree that falling energy prices are a net positive for an economy (except for oil exporting countries like Russia and Venezuela). But the fact that there is even a debate is shocking. It should be clear to anyone that consumers individually, and an economy collectively, benefit from lower energy prices. As I mentioned in a column late last month, no one buys energy for energy’s sake. We simply use it to do or get the things that we want. The lower the cost of energy, the cheaper and more abundant the things we want become.

But if we all can agree that lower energy prices offer a benefit, why can’t we make the same conclusion about food prices? Wouldn’t consumers get a huge “tax cut” if their grocery bills fell as dramatically? How about health care? Wouldn’t we all be better off if our hospital and insurance bills fell dramatically from their currently insane levels? Come to think of it, why wouldn’t we be better off if the price of everything fell? When does too much of a good thing become too much?

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