According to the Washington Times from June 10, 2026, the US President Donald Trump brushed off the rising inflation number—i.e., the yearly growth rate of the consumer price index (CPI)—which jumped to 4.2 percent in May from 3.8 percent in April.

“No, I love it. The numbers were great. You know what I really love? I love the inflation,” Mr. Trump said in the Oval Office. The US President may be expressing a view that is popular in economics. By this way of thinking, the policy of price stability does not always mean that the central bank must fight inflation. It is also the role of the central bank to prevent large declines in the inflation rate, or an outright decline in the general price level. Why would that be?

The argument is that a decline in the price level, which is labeled deflation, weakens consumer and business expenditure, thereby paralyzing economic activity. Furthermore, a decline in the pace of increases in the prices of goods and services (i.e., declining measured inflation) raises real interest rates, thereby further weakening the economy. Additionally, as expenditure weakens, this further raises unutilized capacity and puts additional downward pressure on the price level.

Most economists are of the view that it is much harder for the central bank to handle deflation than inflation. When inflation rises, the central bank can always “cool it off” by large increases in interest rates. With regard to deflation the lowest percentage to which the central bank can take its policy rate is zero. Below this percentage, individuals are likely to be reluctant to lend. Now, by popular thinking, the real interest rate is defined as follows:

Real interest rate = Nominal interest rate – Inflation rate

From this one can establish that:

Nominal interest rate = Real interest rate Inflation rate

Let us say that, as a result of a decline in the inflation rate from 1 percent to -1 percent, central bank policymakers have concluded that a real interest rate of -0.5 percent is required to counter deflation, thereby preventing economic deterioration. At an inflation rate of -1 percent, this would require the central bank to lower the nominal interest rate to -1.5 percent. Since this is below the zero lower bound, individuals are likely to be reluctant to lend.

Likewise, it is argued that when the inflation rate is very low this can also create problems. Suppose that inflation has fallen from 2 percent to 1 percent. At a nominal rate of 0 percent, the central bank can set a target for a real interest rate of -1 percent. It cannot aim at a lower real interest rate since........

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