The January 2015 U.S. inflation data proved interesting. There is actually deflation, as marked by the 0.1% decrease in the inflation rate, resulting in lower prices. When you have inflation, which is what everyone wants (to a degree), debt becomes cheaper because money is worth less over time. Prices also go up and wages usually follow.
One reason governments want inflation is that if wages go up, they can be taxed, meaning more tax revenue. While increased taxes aren’t necessarily favorable, the economic conditions that enable them usually mean growth.
Granted, if everything becomes cheaper and we have the same income, it’s a de facto raise, enhancing our overall standard of living. The government can’t tax that scenario.
Conversely, deflation and its lower prices and wages become an economic death spiral because deflation delays buying. In a deflationary economy prices go down over time. So why pay $100 for a product now when you can pay $60 for it in a month?
So governments really don’t want deflation because it shrinks tax revenue and delays economic activity.
The solution? Essentially print more money with the intent of creating inflation.
However, our federal government is running out of bullets because inflation isn’t happening. And for all the economic tools being deployed, it’s not resulting in lending relative to bank reserves.
In short, the velocity of money is stagnating. If this becomes a trend, our economy could really deflate.