What Affects Deflation

Monetary policy implemented by central banks is the single biggest factor affecting deflation, as it directly influences the money supply and interest rates, thereby decreasing deflation by 2-3% when expansionary policies are used, such as the European Central Bank's quantitative easing program, which increased the money supply by €2.6 trillion between 2015 and 2018.

Main Factors

• Monetary Policy — affects deflation by controlling the money supply and interest rates, decreases deflation by 2-3% when expansionary policies are used, as seen in the Bank of Japan's negative interest rates, which decreased deflation from -0.1% in 2016 to 0.5% in 2018.
• Fiscal Policy — influences deflation through government spending and taxation, decreases deflation by 1-2% when expansionary fiscal policies are used, such as the US American Recovery and Reinvestment Act, which increased government spending by $831 billion in 2009 and reduced deflation from -2.1% in 2009 to 1.5% in 2010.
• Supply and Demand Imbalance — affects deflation by altering the balance between the supply of goods and services and the demand for them, increases deflation by 1-2% when there is a surplus of goods and services, as seen in the 2015 global oil surplus, which led to a 50% decrease in oil prices and a 1.5% increase in deflation.
• Technological Advancements — influences deflation by increasing productivity and reducing production costs, decreases deflation by 0.5-1% as seen in the manufacturing sector, where automation has reduced production costs by 10-20% and decreased deflation from 1.2% in 2010 to 0.8% in 2015.
• Global Trade — affects deflation by altering the prices of imported goods and services, increases deflation by 0.5-1% when there is a surge in cheap imports, such as the 2015 Chinese currency devaluation, which led to a 20% decrease in Chinese export prices and a 1% increase in global deflation.
• Expectations and Confidence — influences deflation by altering consumer and business expectations and confidence, decreases deflation by 1-2% when expectations and confidence are high, as seen in the 2018 US tax cuts, which increased business confidence by 10% and decreased deflation from 1.1% in 2017 to 0.8% in 2018.
• Demographic Changes — affects deflation by altering the size and structure of the population, increases deflation by 0.5-1% when there is a decline in the working-age population, such as in Japan, where the working-age population decreased by 10% between 2000 and 2015, leading to a 1% increase in deflation.

How They Interact

The interaction between monetary policy and fiscal policy can amplify their individual effects, as seen in the 2009 US stimulus package, where the combination of expansionary monetary and fiscal policies decreased deflation from -2.1% in 2009 to 1.5% in 2010. The interaction between supply and demand imbalance and global trade can also amplify their individual effects, as seen in the 2015 global oil surplus, where the combination of a surplus of oil and a surge in cheap imports led to a 2% increase in deflation. The interaction between technological advancements and expectations and confidence can also amplify their individual effects, as seen in the 2018 US tax cuts, where the combination of increased business confidence and productivity growth decreased deflation from 1.1% in 2017 to 0.8% in 2018.

Controllable vs Uncontrollable

The controllable factors include monetary policy, which is controlled by central banks, fiscal policy, which is controlled by governments, and global trade, which is influenced by trade agreements and tariffs imposed by governments. The uncontrollable factors include supply and demand imbalance, which is influenced by various market forces, technological advancements, which are driven by innovation and research, expectations and confidence, which are influenced by various economic and social factors, and demographic changes, which are driven by population growth and migration trends.