Deflation in Canada: why economists will tell you that falling prices is not something to be happy about

Now you may be thinking that with prices falling, this should be a cause for celebration, certainly not a cause for concern. Well, for a consumer at the checkout this may be the case, but as most economists will tell you, it definitely should not be celebrated. 

And here is why.

Firstly, if prices are rising a little bit, that indicates a healthy economy. It demonstrates that demand for goods and services is high and the economy is growing. Now we don’t want high inflation as that will bring a host of other problems, this is why most economies around the world set themselves an annual inflation target of around 2%.

Secondly, deflation creates uncertainty. If prices are falling, consumers may hold back on making purchases in the hope that they’ll save even more by waiting a little while. This will have a negative impact on businesses revenue as demand for their goods and services begins to stagnate. With falling revenue, there could then be cost cutting measures leading to unemployment and a reduction in output. Both terrible outcomes for the health of the overall economy.

Another big problem with deflation is that it increases the debt burden. This means that those who have a lot of debt, are likely to experience a decrease in their income due to falling prices but the value of their debt will remain the same. This will put financial pressure on borrowers, leading to further shockwaves throughout the economy.

So there you have it Canada. Your groceries might be a bit cheaper this week but you better hope they won’t be for long. Deflation is a nightmare you don’t want to be trapped in!