Why do governments prefer to maintain a small amount of inflation instead of allowing prices to fall through deflation?
Answer (1)
While it may sound better to have prices fall, deflation—a general decrease in prices—is actually considered more harmful to the economy than a small amount of inflation. Governments, including the Philippine government, prefer to maintain a low and steady inflation rate (usually around 2% per year) because this encourages spending and investment, which are key drivers of economic growth.When prices fall over time, people begin to delay purchases. For example, if a laptop costs ₱30,000 today but might cost ₱28,000 next month, you’ll probably wait. If many people do this, businesses start to lose income because no one is buying. To adjust, they may lay off workers or cut production. As more people lose their jobs or earn less, spending drops even further. This creates a downward spiral—less spending leads to fewer jobs, which leads to even less spending.Deflation also makes debt more expensive. If you borrowed ₱100,000 to start a small business and prices fall, your income may drop, but your debt stays the same. So, you’re paying back the loan with money that is now worth more. This is discouraging for both borrowers and lenders.In contrast, a small amount of inflation gives people a reason to spend now instead of later. If you expect prices to rise slowly, you are more likely to buy today, keeping the economy active. It also helps employers increase wages gradually, and it reduces the real burden of debt, which is useful for both households and the government.For a developing country like the Philippines, maintaining a small, predictable level of inflation keeps the economy moving, supports job creation, and avoids the dangers of deflation, such as recession and widespread unemployment.
