Eli5: Why is deflation more difficult to fix than inflation?
In: Economics
Deflation enters a death spiral because (some) people are increasing their buying power specifically by withholding their money.
If you knew cars and houses and televisions will be 40% more expensive next June, you’d race out to buy one now.
If you knew cars and houses and televisions will be 40% *less* expensive next June, you’d squat on that money for a year.
Economic activity plummets during deflationary periods because people withhold all but the most vital non-discretionary spending so they can get it cheaper later.
That freeze tanks the markets and makes things even cheaper as companies get increasingly desperate to shed inventories, and the cycle feeds upon itself until companies finally go out of business and a supply crash forces prices up.
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