What could be bad about falling prices? After all, everyone wants their paycheck to stretch a little further. The problems start when cheaper cars, clothes and gadgets keep getting cheaper, a damaging downward spiral known as deflation that can wreck an economy. In the economic shock triggered by the coronavirus pandemic, the fear is that prices around the world could start falling, pushing the global economy from recession into something even harder to climb out of.
When prices drop across a wide range of goods and for a long time, economic activity can screech to a halt. The more buying power shoppers think they will gain by waiting for cheaper goods and services, the more they put off buying anything at all. Delayed purchases squeeze company sales and profits, prompting firms to postpone investment and hiring and to keep a lid on wages. Poorer job prospects and stagnant pay make households stingier, putting more pressure on firms to keep prices down. Companies, workers and households all end up suffering.
