There is currently much talk of the dangers of deflation and the specter of its imminent arrival in the Eurozone. The Economist newspaper proclaimed last week that if deflation were to set in, the single currency would be in peril.
Economists assume that deflation, or falling prices, reduce consumption as consumers defer spending in the hope of things getting cheaper in the future. Economists predict that this force combines with falling wages, which make debts harder to pay off so driving a grim downward spiral.
Switzerland however has experienced deflation and instead of entering an economic doom loop its economy has faired better that most EU countries which have inflation. Consumer prices went down by 1.1% between 2010 and 2013, while consumption increased by 4.4%. Average household income also increased between 2010 and 2012. This is puzzling.
It may be that Swiss consumers expected prices to rise and consumed in line with this belief despite prices actually falling. This explanation fits with Swiss National Bank 2010 inflation forecasts of 0.4% for 2011 and 1.0% for 2012.
Mark Twain once said: be careful about reading health books. You may die of a misprint. Perhaps we should take the same care when reading inflation figures.