For context – I just saw a post that said for the first time since 2020 McDonald’s hasn’t made as much money or something, and their prices have increased 40% since 2019. – if big companies start losing profit because people chose to not spend their money there because they can’t afford it, Would prices ever go back down?
In: Economics
Possibly, but if they did it would generally be bad. It’s called deflation
The reason it’s bad is that for one, the cause of deflation is usually a slow down in the economy, so that alone is not great. But, also, if prices start falling then consumers will stop spending, waiting for prices to go down even further. If you know the price of cars or TVs will be lower by a significant amount in a month or six months, you’ll put off buying those things
That delay in spending then speeds up the decline in economic activity, and eventually you get into a really bad (Great Depression) situation
Ideally, there should be a *little* bit of inflation, and that is what the US Federal Reserve (and basically every other central bank in the world) is trying to do–how can they get inflation down to their target 2%, but not tank it where it goes negative.
This little bit of inflation encourages people to invest their money in the economy–start a business, loan it out, buy the thing they want to buy instead of waiting, etc, instead of stuffing it in their mattress and not circulating. This stimulates economic growth
The trick, which we’ve seen the past 4 years, is too much inflation is bad in the other direction in that people can’t afford things, and eventually that will grind the economy to a halt
So, in the end you want a little bit of positive inflation, but not too much, and deflation is generally very bad
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