Why you should fear lower prices

Lower prices at the grocery store; cheaper clothes...what's wrong with that? A lot as it turns out, especially if it lasts for a few years say economists. Here's the lowdown on why deflation, a period where prices decline, is not good for the economy.

1) Consumers don't buy stuff

Who's going to buy a flat screen TV today when the price is probably be lower in a week or few months? People put off purchasing and investing, so its hard to get the economy moving. And that makes it very hard to get out of a period of deflation.

2) Businesses cut back

If consumers aren't buying and products are getting cheaper, businesses aren't making as much profit. So they start cutting jobs. And if you don't have a job, you're not spending your cash as freely. The cycle continues.

3) Borrowers are hurt

If you have a loan in a deflationary environment, you're getting the short end of the stick. That's because while it may be cheap to borrow, you have to pay the loan back with more expensive dollars.

Economists we spoke to say we're a long way away from deflation. But the risks do exist. The best way to be prepared in a deflationary environment: bonds and cash.

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Posted by: Gerri Willis, Personal Finance Editor
Filed under: Finance • Living • Willis