The costs of inflation include the shoelather costs, menu costs, tax distortions, costs of confusion and inconvenience, and arbitrary distribution of wealth. They’re all important, but the one that probably most affects people worldwide is arbitrary distributions of wealth. Because most countries have high rates of inflation, they are unpredictable and cause unexpected inflation. This is bad for those who take out a loan and then over the years there’s deflation instead of inflation, meaning their wages may be lowered and they’ll have no way of paying the interests on their loans.
Deflation could be a problem because it’s unpredictable, and it mirrors the same costs that inflation has except for shoeleather costs, which economist Milton Friedman believed was a good thing for thing for the economy. What he didn’t take into consideration was the lower wages people would be receiving and the higher unemployment rates. I agree that the FRB should worry about deflation more than inflation because inflation has been the norm, while deflation has proven to be a symptom of greater economic issues. It can affect not only the people paying high levels of interests rates with lower wages but also those who are laid off because businesses haven’t adjusted to lower prices and have been struggling in sales, and it can potentially create a dangerous cascading effect that leads to something nobody wants such as a depression.
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