Why is deflation considered harder to fix than inflation, and what tools can central banks use to stop it?
Answer (1)
Deflation—when prices go down across the economy—is considered harder to fix than inflation because it creates a cycle of falling demand and economic slowdown. When people see that prices are going down, they often delay buying big items like appliances, phones, or even cars. Businesses then earn less money, cut jobs, or lower salaries. With less income, people spend even less, which causes more deflation. This is known as a deflationary spiral.In contrast, inflation (rising prices) can be controlled more easily by raising interest rates, making loans expensive, and slowing down spending. But deflation is tricky because even if the central bank lowers interest rates, people might still not borrow or spend, especially if they expect prices to keep falling.One major problem is the “zero lower bound”—interest rates can’t go below zero easily. If the central bank has already cut rates to zero, it has fewer tools left. This was a big issue in Japan during the 1990s and 2000s, when their economy faced long-term deflation and low growth.To fight deflation, central banks can do the following:Print more money or buy government bonds (called quantitative easing) to increase money supply.Encourage borrowing by keeping interest rates low for a long time.Raise inflation expectations by promising to let inflation go higher temporarily.In the Philippines, the BSP has not had major deflation issues recently, but it remains cautious. If deflation were to occur—say, due to a global recession—it could use these tools to keep the economy moving.In short, deflation reduces demand and slows down the economy. It’s harder to fix than inflation because even when money is cheap, people may still avoid spending. Central banks must act early and decisively to avoid long-term damage.
