Whats wrong with deflation ?

needahome_2

I'm confused about why deflation is bad ? isn't that afterall been the goal of goverment policy ? remember when people where getting below inflation pay rises because inflation needed to be controlled, well inflation has not only been controlled it has been beaten!

everyone is a winner I see, people on benefits will get an increase in their money in real terms as benefits can't be reduced. pensioners are laughing as they are guaranteed a minimun rise of 2.5%, so there will less old folks freezing to death next winter. everyone moaning about low interests rate will see the purchasing power of their money increase.people in jobs wont need to worry that they aint get a payrise again. business wont need to worry about the staff not getting a payrise, as they will get one in real terms without the company having to fork out any extra.

inflation erodes living standards, deflation increases it, why the fcuk is it bad news ?

handful

Very mild deflation isn't too much of an issue but if it gets hold, people people put off buying everything because they know the price will drop, manufacturing (what's left of it) collapses more, people lose their jobs so prices have to fall further in order to attract sales etc etc.

Masomnia

Because as prices fall, profits fall too, so wages either have to come down or unemployment has to increase.

For one thing, if wages fall then people with debt are in trouble as their ability to pay off debt falls whilst the value of their debt increases. Unemployment is obviously bad for all sorts of reasons.

A little deflation probably is no bad thing, but protracted deflation can really screw the economy over.

TJ27

Yup. The problem is that nobody buys anything because it'll be cheaper next month.

needahome_2

TJ27 wrote: »

Yup. The problem is that nobody buys anything because it'll be cheaper next month.

sorry but that's b0ll0cks, electrical goods become cheaper all the time, it doesn't stop people from buying them.

as for food, i can hardly see someone saying to their family "we're not eating this week, as the food will be cheaper next week"

handful

needahome wrote: »

sorry but that's b0ll0cks, electrical goods become cheaper all the time, it doesn't stop people from buying them.
"

Tell that to all the STLs on here

Also, a large deflationary paycut might give you a different view on when to buy when prices are dropping.

ad9898_3

Anything around 0 to -1% isn't too much of an issue when the economy is tanking, however get to -5% or so, and the economy goes into full scale contraction with job losses and pay cuts as people 'wait for tomorrow' to buy buy things that they know will be cheaper then.

No worries at the moment though as our current deflation is manufactured by the government, to rescue mortgage holders with low interest rates, who otherwise would be repossessed, real inflation is running above the government target at 2.9%. The bad news though is pay freezes and cuts (caused by 4 day week for instance), is causing everyone to become poorer (except SVR and tracker mortgage holders).

Cannon_Fodder

re Pensions, the State Pension has the fall-back of 2.5% you mention.

However, Private Pensions may not. It will vary by provider, but some track RPI strictly. So a private pension, I believe the Pru and Standard Life were mentioned, can reduce...

zappahey

needahome wrote: »

electrical goods become cheaper all the time, it doesn't stop people from buying them.

It does, you know. I know loads of people who keep putting off computer purchase because they "will get a better one next month for the same price"

stephen163

needahome wrote: »

sorry but that's b0ll0cks, electrical goods become cheaper all the time, it doesn't stop people from buying them.

as for food, i can hardly see someone saying to their family "we're not eating this week, as the food will be cheaper next week"

Don't forget, the economy is prone to small changes in consumer behaviour. If about an extra 5% of the public decide to wait rather than buy (as they usually would, in an inflationary environment), it has a big effect on retail sales.

It's well rehearsed and observed economic theory. Just look at what's happened to Japan in recent times!

Food doesn't count, obviously.

cocktail

a lot depends on what is in the basket of the index.
for example: my mortgage has become cheaper, my grocery bills have increased about 15-20% atleast. My house is worth less but my debt remains the same.