Deflation
is when prices for goods and services fall over time in an economy, which might sound good, but it can create a “death spiral” for the economy. Here’s why, step-by-step:
Lower Prices, Less Spending: When people see prices falling, they start to hold off on buying things, thinking prices will drop even more. So, instead of spending now, they wait.
Companies Earn Less: As spending decreases, businesses sell less. Lower sales mean less revenue, making it harder for companies to stay profitable.
Cutting Jobs and Wages: To cope with falling sales, companies cut costs. This often means reducing wages, hours, or even laying off employees.
Less Money in People’s Hands: With lower wages and fewer jobs, people have even less money to spend. This further reduces demand for goods and services.
Repeat the Cycle: The cycle repeats—less spending, lower prices, less business revenue, more job cuts. This “deflationary spiral” can keep dragging the economy down, making recovery extremely difficult.