Falling prices: Fun for now, but not for long
Gas prices fell by a lot from October to November, as did prices for several other components of the inflation indices -- so the Bureau of Labor Statistics reports that the Consumer Price Index fell nationally. In the short run, everyone likes falling prices -- they're the equivalent of getting a bonus in the paycheck. But if falling prices persist and turn into deflation, some bad things can happen. ■ If employers expect price pressure to be persistently downward, they're going to be reluctant to offer raises to employees or to issue bigger dividends to shareholders. We like deflation when we're consumers...but not when we're producers. ■ Persistent deflation discourages people from spending (why spend a dollar today when it'll be worth $1.10 later?), and since consumer spending is a huge component of the national economic ledger (specifically, 70% of GDP), if consumers hold off on spending in the enduring hope of getting more for their money later, they can depress the lion's share of economic activity. ■ And while it would seem that a currency that buys more over time would be a good way to encourage savings, it's not a very good way to encourage useful investment.
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