For most experts, deflation is bad news since it generates expectations for a further decline in prices. As a result, they believe, consumers postpone their buying of goods at present since they expect to buy these goods at a lower prices in the future. This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators believe that policies that counter deflation will also counter the slump.
But does it make sense that a fall in prices should actually cause people to postpone buying goods? To maintain their life and wellbeing individuals must live at present, hence they buy goods at present regardless of the fact that prices are falling.
From December 1997 to August 2009, the prices of personal computers have fallen by 93%. Did this fall in prices cause people to postpone buying personal computers? On the contrary, since December 1997 consumer outlays on personal computers have increased massively. These outlays stood at $83.2 billion in August 2009 as compared to $3.4 billion in December 1997.
Read more on the need for a better understanding of inflation and deflation here.Published in