Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?
Example: a factory buys components and builds something. It may take some time until the components arrive at the factory and the final product is shipped to be sold. In this moment the price may be lower than anticipated, it may not cover the original cost or you may get higher profits if you keep money in a deposit and get the interest. To avoid loss the owner will stop production and lay off people.
Deflation sounds good, we all love lower prices but on long term will lead to unemployment.
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u/StuartMcNight 9h ago
Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?