Real Time Economics points out that the threat of deflation is very real. Why should we care about falling prices? Isn’t it great when the things we buy become cheaper? Here is an example of why we should worry:
Let’s say you wanted to buy a mini laptop so you could read this blog. It currently sells for $500 but you hear it’s going on sale next month for $400. Most likely, you will wait so you can save $100. That is what’s best for you.
What if everyone who wants to buy a mini (and many other products) thinks the price is going down next month? They will wait to buy their products at a lower cost. This is great for the consumers but bad for businesses. If you are the business trying to sell mini laptops and everyone is waiting for your price to drop, your sales tank. What you will probably do is layoff people and produce fewer laptops. When more people are out of work, there is less spending since they don’t have as much money. This leads to more deflation because people will know the prices will fall even further. It will also lead to more layoffs.
It’s a scary downward spiral. Just about every economist will tell you deflation is worse than inflation (prices going up) for an economy. We are seeing this in our housing markets. Buyers are just sitting on the sidelines until there is a bottom. The problem is, there will be no bottom if there are no buyers. We would have to wait until houses are free (This won’t happen but it gives you something to think about)! Great for someone looking to buy a house but horrible for someone selling one. President Obama and the Fed have their work cut out for them.