Why is deflation considered dangerous for the economy even if prices are going down?
Answer (1)
At first glance, deflation—or a general drop in prices—might seem like a good thing. After all, who wouldn’t want cheaper goods and services? But economists consider deflation dangerous because it causes people and businesses to delay spending and investing, which can harm the entire economy.Here’s why: When people expect prices to keep falling, they may decide to wait before buying things like phones, cars, or appliances. “Why buy now if it’ll be cheaper next month?” becomes the common thinking. If millions of consumers do this, businesses earn less income and may have to lay off workers or close down. Unemployment rises, people have even less money to spend, and the economy slows down even more.Deflation also hurts borrowers. If someone takes out a loan and deflation occurs, the real value of the debt increases. For example, if you owe ₱10,000, but your income falls because prices are dropping and jobs are lost, it becomes harder to repay your loan. This causes more loan defaults and can harm banks and lenders too.In the Philippines, we have not experienced strong deflation in recent years, but Japan suffered from this during the 1990s and early 2000s. Their economy stopped growing for over a decade because people were not spending, businesses were not expanding, and prices kept falling. It was very hard to recover.Deflation is also hard to fix. While central banks can raise interest rates to fight inflation, they can’t lower interest rates below zero to fight deflation. Once deflation starts, it’s hard to stop. That’s why economists and central banks are very careful to prevent deflation and prefer a small, healthy amount of inflation (around 2%) to keep the economy moving forward.
