Deflation. What does it mean? We all know that inflation is something we don’t like but could deflation be bad as well?

Of course we are accustomed to high prices. Discount stores generally have lower prices on items than the corner store or the convenience store. If prices decrease how can that be bad?

Consumer prices are decreasing because people do not have any money and are buying less. In order to get people to buy things retailers decrease the price. Unfortunately when the prices decrease below the cost of manufacturing, this is more than a loss leader this is deflation and can ultimately be bad for the economy in the long run.

If prices fall below the cost it takes to produce products, businesses will likely have to cut production and slash payrolls. Rising unemployment would cut demand even further, sending the economy into a vicious circle.

Deflation usually represents a system-wide contraction in demand, with consumers waiting on the sidelines as they wait for prices to decline even further.

Deflation isn’t here yet and the solution isn’t to buy more things. Inflation is settling and prices are returning to normal levels. This is definitely something that is important so that necessities are affordable. The only area where prices are really falling are at the gas pump and in housing. Food is still expensive but there is still a demand for food.

Low prices don’t necessarily mean that there is deflation occurring. This may mean that there is less profit that companies will make and make them more competetive.