When was the last time you heard the head of a central bank assert that deflation is beneficial to the economy, even if only as a “correction” of previous inflation? Well, if you were paying attention, you would have heard it just last week when Nandalal Weerasinghe, Governor of the Sri Lankan central bank, announced changes in his nation’s monetary policy. While prices in Sri Lanka have declined by 2.1 over the past twelve months to a level not seen since September 2022, the economy has been growing at a rapid rate of 4.5 per cent per year. In addressing this seeming paradox, Governor Weerasinghe explained to reporters:
It comes after very high inflation. We had food inflation of 100 percent. We see the deflation as a correction. If there is some negative effect from deflation, it has to be shown through economic growth [which given its healthy rate of increase has not been negatively affected]. So we see it as a correction. It is good for the cost of living. So it is a benefit for the people.
Unfortunately, Governor Weerasinghe’s statement was not a full-throated endorsement of deflation as a long-run monetary policy. In fact, it was made immediately after the central bank had lowered its policy rate from a corridor of 8.25 to 9.25 percent to a single rate of 8.0 percent. This loosening of monetary policy, according to the Governor, was aimed at the long-term strategy of slowly raising the annual inflation rate to 5 percent. What Mises termed the “ideology of inflationism” has become so deeply entrenched among the public, politicians, policymakers, and most economists that it cannot be dislodged even by episodes like Sri Lanka’s that starkly illustrate the logic that falling prices are the natural complement of economic growth.
