What happens when inflation is too low or there is deflation? Why is this also a problem?
Answer (1)
While high inflation is often viewed as harmful, very low inflation or deflation (a decrease in prices) can also be a serious problem for an economy.Deflation happens when the general price level of goods and services falls over time. At first, this might sound like a good thing—cheaper prices for everyone! But in reality, deflation can hurt both consumers and producers. Why Deflation Happens?When people expect prices to keep going down, they delay their purchases. For example, if a student wants to buy a smartphone but believes it will be cheaper in a few months, they will wait. If many people do this, businesses lose customers, profits fall, and companies reduce production. This often leads to layoffs and unemployment.Deflation in Japan and PhilippinesIn Japan during the 1990s and early 2000s, deflation lasted for many years. People stopped spending and companies stopped investing. The economy was stuck in what was called the "Lost Decade" because growth was so slow. Japan’s central bank struggled to bring prices back up and had to use unusual policies like zero-interest rates and large-scale money printing.For countries like the Philippines, deflation can be just as harmful. It can lead to slower economic growth, especially in agriculture and small businesses. Farmers, for example, might not plant rice if they expect prices to drop below the cost of production. If many farmers act this way, food supply decreases and eventually causes instability.Deflation also makes debts harder to repay. If you borrowed ₱10,000, but the value of money increases because of deflation, you are paying back a loan that is "heavier" in value than what you borrowed.
