Deflation's Hidden Danger

Deflation sounds like good news, but falling prices can wreck an economy even faster than rising ones. When prices drop, people delay purchases, expecting things to get cheaper tomorrow.

This creates a vicious spiral: less spending means lower revenues, which leads to layoffs, which cuts spending further. Japan lived through this in the 1990s and 2000s, a stretch economists call the Lost Decades.

Central banks fear deflation so much that they target a small positive inflation of around 2%. That steady, gentle price rise pushes people to spend and invest today rather than hoard cash.