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When prices across the economy are falling - the opposite of inflation.
Why It Matters
Deflation sounds great - everything gets cheaper! But it's actually dangerous. If people expect prices to fall, they delay purchases ('I'll buy that TV next month when it's cheaper'). This kills demand, companies lay off workers, and the economy spirals. Japan struggled with deflation for 30 years. The Fed fears deflation more than inflation.
Key Points
- Bonds and cash do well in deflation (your dollars buy more over time)
- Stocks and real estate typically suffer during deflation
- The Fed will aggressively cut rates and print money to prevent deflation
Related Terms
Common Questions
When prices across the economy are falling - the opposite of inflation. Deflation sounds great - everything gets cheaper! But it's actually dangerous. If people expect prices to fall, they delay purchases ('I'll buy that TV next month when it's cheaper').
Deflation sounds great - everything gets cheaper! But it's actually dangerous. If people expect prices to fall, they delay purchases ('I'll buy that TV next month when it's cheaper'). This kills demand, companies lay off workers, and the economy spirals. Japan struggled with deflation for 30 years. The Fed fears deflation more than inflation.
Bonds and cash do well in deflation (your dollars buy more over time)
Stocks and real estate typically suffer during deflation
The Fed will aggressively cut rates and print money to prevent deflation