Why is deflation dangerous, and what could happen if the Philippine economy experiences it?
Answer (1)
Deflation is when the overall prices of goods and services fall over time, and while this might sound good to consumers, it’s actually dangerous for the economy. When prices are consistently going down, people start delaying purchases because they expect things to become cheaper later. This leads to less consumer spending, which then causes businesses to earn less, cut costs, lay off workers, and reduce investment. It creates a cycle of economic slowdown.If the Philippines were to experience deflation, here’s what could happenConsumers delay buying major goods like appliances or cars, hoping prices will drop more. This lowers demand.Businesses lose profit, close shops, or downsize to cut expenses.Unemployment increases, and people have less money to spend, which makes deflation worse.Even if banks offer zero-interest loans, people may still avoid borrowing because they are unsure about the future.This was similar to what happened in Japan during its “Lost Decade” in the 1990s. Prices kept falling, and despite near-zero interest rates, economic growth stalled. Japan had to use massive government spending just to prevent total collapse.In the Philippine context, deflation might occur after a deep recession or major global shock. If many Filipinos lose jobs—like during the pandemic—but prices also fall, people might become more cautious with money. Businesses, especially small and medium enterprises (SMEs), would be most at risk.The Bangko Sentral ng Pilipinas would try to stop deflation by lowering interest rates, buying government securities, or encouraging more borrowing and spending. The government might also increase public infrastructure projects to boost jobs and demand.In summary, deflation reduces spending, slows down the economy, and raises unemployment. It’s important for both government and the BSP to act quickly to prevent deflation from taking hold.
