Deflation Dangers: Why Falling Prices Could Risk Economic Crisis

Prices rose rapidly during pandemic recovery, and while inflation is slowing, prices remain painfully high compared to pre-pandemic levels. This is making Americans unhappy.

Falling prices (deflation) might seem appealing, but economists warn it can damage the economy by discouraging consumer spending.

Deflation can trigger a spiral of falling prices, job losses, and reduced spending that risks recession. It also makes loans more expensive.

Main historical example is the Great Depression of the 1930s, when prices fell 25% alongside a 33% drop in economic output and 25% unemployment rate.

Asset price collapses that hurt banks and limit credit pose the biggest economic threat from deflation, rather than falling prices for goods and services.