The stock market plunged in late October and into November. The Dow and S&P recovered some of the loss but other indices are still down on the year. While the Federal Reserve has raised interest rates, they are still near historic lows after almost a decade of QE and cheap money to keep the post-Great Recession economy moving.
What is Deflation?
Deflation is when there is less money in the economy and prices begin to fall. Most economists assume 2% inflation per year, however, that is no longer the case. Many people thought low interest rates and QE would cause inflation when exactly the opposite has occurred.
Why Is Deflation Bad?
Deflation isn’t good for an economy for several reasons. According to the Brookings Institute, deflation can cause prices to fall which is good for consumers but people often put off buying which eliminates growth and puts it off into the future. This causes less hiring and sometimes causes wages to fall as growth stalls. Deflation pressures could also be behind the fact that the US economy is at full employment and wages have only slightly creeped higher. Debtors are in trouble because while the price of everything else falls, the value of debt does not. To compensate, spending is cut which also hurts economic growth and decreases hiring.
How to Stop Deflation
Here too is another problem, getting out of a deflationary spiral is no easy thing either. Central banks need to expand the money supply but you can only lower the interest rate to zero and even then, as Japan proves, that is no guarantee of growth or of inflation. When it cannot be combatted, deflation can cause a stagnant economy and lost growth where the economy doesn’t spiral into recession but simply doesn’t get any bigger.
What Does This Mean For the Everyday Person?
It means that prices will fall, wage raises will be more rare, and layoffs and slow hiring may have an abject effect on economies moving forward. Finding ways to increase economic growth through trade and other measures could stave off deflation, but still, get ready to hear much more about deflation in the new year.