Eli5: Why is deflation more difficult to fix than inflation?
In: Economics
The problem is that supply is more difficult to create than demand. And deflation typically takes supply out of the market.
For someone to establish a company (ie add to supply) that usually take capital, expertise and time. Typically the investment is made when there is a forecast for enough sales over a fairly long period (many years if not decades). No one invests millions in capacity if they think it will only be profitable for one year.
Deflation means prices fall and this means suppliers go bankrupt or stop investing or downsize. This leads to loss of demand (fewer working people) and this means even more deflation as demand falls. So deflation very quickly reinforces itself into a downward spiral.
Inflation is demand exceeding supply. Prices rising incentivizes investment in more production. This means more spending (hiring etc) which then leads to growth and possibly more demand and rising inflation. While this is also an upwards spiral – what happens is usually people earn more and consume more. This is generally considered a good thing. This is why high growth economies also typically come with higher inflation.
Demand, though, is more easily tamed – increasing interest rates leading to less borrowing. In a relatively wealthy and functioning economy, eating out one day less a month, or delaying that new car purchase does not typically lead to a lot of hardship. However poor economies with poor economic governance can slip into a spiral of inflation if too much money is released into the economy such that the currency is devalued faster than economic investment is made to increase supply.
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