What happens during deflation?
Answer (2)
During deflation, the overall price levels of goods and services fall, meaning that money becomes more valuable over time. At first, this might sound good for consumers—who doesn’t want cheaper goods? But deflation can actually hurt the economy if it continues for too long.Here’s why: when people expect prices to keep falling, they delay their purchases. Imagine you’re planning to buy a phone for ₱10,000, but you believe it will only cost ₱9,000 next month. You wait. But if everyone waits, businesses don’t earn, and when they can’t sell, they cut production or lay off workers. This leads to more unemployment and even less spending—creating a dangerous cycle.In Japan, this happened in the 1990s during what’s called the “Lost Decade.” Prices were falling, but so were wages and business profits. The Japanese government had to work hard to stimulate spending.The Philippines hasn’t experienced long-term deflation, but short-term deflation can occur in specific sectors. For instance, after a good rice harvest, prices may fall temporarily. However, long-term national deflation is rare—and dangerous.Deflation also affects borrowers, because loans become more expensive in real terms. A person who borrowed ₱50,000 to buy a tricycle must repay the same amount, but if income drops due to falling prices and wages, that repayment becomes harder.Understanding deflation teaches us that stable prices—not falling or skyrocketing ones—are healthiest for a growing economy.
During deflation, the general price level of goods and services in an economy decreases over time. This means money gains value, allowing consumers to buy more with the same amount of money. While it may seem beneficial, deflation can lead to reduced consumer spending, lower business profits, wage cuts, and increased unemployment, potentially slowing economic growth.
