Deflation
Deflation is the word used to describe falling prices. These are not necessarily a bad thing.
Deflation is the word used to describe falling prices. These are not necessarily a bad thing. They can, for example, be caused by rising productivity or reduced costs in an industry. But a period of sustained nationwide deflation can be very destabilising.
If consumers feel that prices are likely to fall over time, they tend to delay purchases (they hold cash with the expectation of being able to purchase the same goods at a lower price later). This pushes down corporate profits which, in turn leads to cost cutting and unemployment, which then reduces consumption further.
Deflation is also bad for borrowers contractually committed to making cash repayments. As prices fall, the real value of debt rises, making it much harder to pay back (prices and your wages may be falling, but the debt stays the same).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
Car tax rules are changing: what are the new vehicle excise duty rates?
The rules around vehicle excise duty are changing this April. What are they, and how are they going to affect you?
By Daniel Hilton Published
-
Most affordable cities for single homebuyers revealed
Buying a home by yourself? Analysis by Zoopla reveals the most affordable cities in the UK
By Ruth Emery Published