Falling prices sound like good news. Everything gets cheaper. But when prices fall across the whole economy for a sustained period, the result is deflation, and it can be far more dangerous than inflation. Japan has struggled with it for decades. The Great Depression saw it in the 1930s.

The problem is that deflation changes behavior. If prices will be lower next month, why buy today? Consumers delay purchases. Businesses postpone investment. Demand falls further, which pushes prices down even more. A downward spiral takes hold. Debt becomes harder to repay because the money owed is fixed while incomes and prices shrink. Borrowers cut spending to stay afloat, deepening the slump.

Central banks fight deflation by cutting interest rates, but rates cannot go below zero in normal times. They can buy assets to inject money, a policy called quantitative easing. It helps, but slowly. Deflation is sticky. Once expectations of falling prices set in, they are hard to break.

Why deflation hurts

• Consumers delay spending
• Debt burdens grow in real terms
• Businesses cut investment and jobs
• Wages fall, reducing demand further
• Central banks run out of room to cut rates