ECONOMY
What is deflation and how can it affect your day-to-day?
The US economy has been dominated by inflation in the last two years but some goods are seeing their prices drop.
Journalists have been reporting the first cases of decreasing prices in the US economy. Wall Street Journal reporter David Harrison has noted that durable goods, products meant to last more than three years, have fallen in price for five straight months.
A classic example of deflation, what makes this different is prices are actually falling rather than low inflation say of 0.5%. In the latter figures case, the price will still rise very slowly over a year while durable goods have fallen in price by 2.6% in the last month alone.
Deflation is an economic phenomenon characterised by a sustained decrease in the price level of goods and services in an economy. It is the opposite of inflation, where prices generally rise over time. This can be driven by factors such as decreased consumer demand, increased productivity, or external shocks to the economy.
Inflation is still higher than the Federal Reserve’s target of 2%, currently sitting at 3.1% as per the latest data.
How can deflation affect your day-to-day?
Deflation often leads to a situation where consumers expect prices to fall further. Consequently, they may delay purchases with the idea that purchases will be worth less in the future. This will lead to an overall economic slowdown as consumers hold on to their money instead of putting it back into the economy.
If deflation spreads around the rest of the economy, then the outcomes are more severe. Declining consumer spending results in lower revenues for businesses, leading to reduced profits. In response, companies will cut back on production, leading to layoffs and increased unemployment. Debt becomes more expensive leading to financial problems for people and businesses.