Why Deflation Is Bad

While prices are falling and things getting cheaper sounds good, actually it’s not that great... When falling prices (a.k.a. deflation) takes hold, the likelihood of prices falling further might cause people to delay making purchases. Those delays could lead to companies lowering prices to encourage customers to buy, which in turn might cause more people to hold off purchases. Of course, people won’t stop buying essentials like food, for example, but they’re likely to defer discretionary purchases, which weighs on economic growth. Additionally, since virtually all major economies rely on people, companies and governments borrowing money, inflation is necessary. It erodes the value of debt over time, making it easier to repay. So in economies with lots of debt (like the US, UK, Europe and Japan), inflation helps reduce that debt. Too much debt leads to decreased spending (cash is being used to pay interest rather than hiring workers, for example) on things like building factories, or just buying a toaster – which drives economic growth.