Deflation Danger Looms as World Economy Slows

Falling prices could trigger long downward spiral
By Rob Quinn,  Newser Staff
Posted Nov 1, 2008 5:11 AM CDT
Deflation Danger Looms as World Economy Slows
A consumer looks at produce at a market in Tokyo. Deflation was at the heart of Japan's "lost decade" after real estate prices dived.   (AP Photo/Koji Sasahara)

Fears of runaway inflation have been replaced by fears of its opposite as the world's economy starts seizing up, the New York Times reports. Economists see a potentially devastating deflation ahead as cash-strapped consumers create a glut of underpriced, unpurchased goods and services—in turn triggering mass layoffs at struggling companies and sending the US economy into a tailspin that will be tough to halt.

Deflation is a lot harder to tackle than inflation, economists say, as falling prices sour companies on investment—even when interest rates are reduced to zero. The Fed still has some tools to help fight off the danger, but some economists are starting to see worrying parallels between now and the wave of deflation that sunk Japan's economy for a decade.
(More deflation stories.)

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