If deflation continues to eat into corporate revenues and profits, companies will cut wage growth, creating a vicious ‘loop’ of even weaker aggregate demand and deflationary pressures.
In 2002, Ben Bernanke, then a governor at the US Federal Reserve, gave a speech outlining the importance of keeping deflation at bay. He concluded: “Sustained deflation can be highly destructive to a modern economy and should be strongly resisted.”
Such a warning might not seem pertinent for much of the world where central banks are arguably still fighting the battle against inflation. But in China, it seems highly relevant.
