Whats wrong with falling prices?
Everybody loves a bargain, so what could be wrong with falling prices? In isolated cases, nothing — but when prices fall steadily across the economy, there are two problems: • If prices are consistently falling, it is a symptom of wider ills in the economy, most notably slack demand. Weak demand has been the defining problem with the economy over the first half of 2010, as fiscal and monetary stimulus have found little traction. A return to deflation now would almost certainly be a sign of a double-dip recession. • Falling prices may be good for consumers, but not for businesses. Right now, the business sector of the economy is healthier than consumers or the government. However, faced with the prospect of falling prices for the goods or services they offer, businesses will be reluctant to raise their costs by hiring or investing. That would further impede economic recovery. Bank rates and deflation Normally, the prospect of deflation would mean lower bank rates. However, with the FDI
