Deflation is the fall in general price level when the inflation rate becomes less than 0%. The demand for goods fall as a result the price and production decrease. The government of every country take precautionary steps to avoid deflation as it effects the economy negatively and curbs economic growth. The Great Depression of 1930s was a major disaster which effected the entire world, there was negative inflation(deflation) during that time. The unemployment level reached 25% in USA and several people ended up living on streets. It took almost 10 years for the economy to recover back.
Some of the ways in which deflation is bad for the economy are-
1. When people anticipate further fall in prices, they delay purchases which reduce immediate demand. The producers reduce production and cut down on the labour force which has a severe impact on the economy. For eg: If a consumer wants to buy a car and the price of the car is anticipated to fall further in the coming months, the consumer is obviously going to wait for it to become cheaper.
2. Deflation increases the unemployment level. As there is less demands for goods and services the production reduces and the employers let go of laborers to cut down the costs. The problems related to unemployment and it’s devastating effects are already known. Even if the producers keep on producing goods, there is no demand for it and they will incur losses and the storage of these goods will increase.
3. It curbs economic growth and development. With no demand and lessened production, both the economy and the people suffer. All the milestones which are necessary for development and growth come to stand still or is negatively affected. Employment, income levels and production of goods and services are some of the important factors that leads to economic growth but all these are effected badly during deflation.
4. Deflation adversely effects not just the country but people too. Many people loose their source of income and livelihood as many laborers are let go during severe deflation in the country. During the Great Depression of 1930s, many people lost their homes and lived on the streets with no money to buy even necessary goods.
5. The falling prices can make the condition of debtors worse by increasing real debts on the borrowers. The borrowers are forced to reduce their spending to pay their debts which does not necessarily mean that the lenders will increase their spending. This increases the deflationary gap even further.
All these effects of deflation is the reason why it is considered worse than inflation. It severely hampers economic growth and effects all the citizens of the country. Therefore, check has to kept to maintain a certain level of inflation that can prevent deflation in the country. It takes a lot of time for the country to recover from deflation and for the things to go back to normal.