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?
1) If I can expect the price of a pair of shoes to drop if I wait, I’ll wait as long as I can before buying it. The shoe company is going to lose sales and fire workers and the government is going to miss out on taxes (both on the sale and on the now-unpaid salaries).
2) Most governments are deeply in debt. Imagine a fictional country has a debt of 1000 € and today you can buy a loaf of bread for 2 €. The “value” of the debt is 500 loaves of bread. Imagine due to deflation, the price of a loaf drops to 1 €. The value of the debt has gone up to 1000 loaves of bread.
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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?