Deflation is also bad news for people with debt because the money they pay back has more purchasing power than the money they borrowed. Disinflation, while benign, can spiral into deflation. Companies focus on cost cutting and boosting productivity. Wages are held in check or tied to profits. In extreme cases, companies shut down plants and lay off workers.
Consumers husband their slower-growing income and reduce debt.
Depending on confidence levels and job stability, they may begin to hold off purchases in expectation of even lower prices later. Subdued demand in turn forces prices even lower, squeezing profits further. The economy slows, and the cycle begins anew. Inc. All rights reserved.