Don't Worry, Deflation can't hurt us. Really?

When I first started to study Inflation-Deflation, I did not understand the concept of Deflation really. I was like `who cares if the prices are falling it is good? Why worry?` But of course now as an pre-economist I know that I should afraid more about Deflation than Inflation.

Nowadays, Europe specially Euro-zone is facing with the problem; Deflation. In this article, I'm going to try to look at this problem in a economical perspective not as a consumer. Because logically, low prices makes consumer happier than high prices. (Specially when it is end of the month) This is just the one side of the iceberg. Also there is another nasty side.

Firstly, low prices means lower revenues and eventually lower profits for firms. This will lead firms to cut the worker's wage or hire less workers. In any case, economy will affect negatively. If the firm cut the worker's wage, consumer's purchasing power will be lower than before and demand in economy will fall, If firms hire less workers, jobless people will increase and it will cause unemployment problems.

Germany Inflation Graph 12 Months

Secondly, this is mostly written on study books that, people will realize that prices are getting lower and lower and they will wait tomorrow to purchase. It usually happens in real-estate market, when people realizes that house prices are falling. they are waiting right moment to buy. In this case, if you are investor, before sell the house you are starting to lose your investment. This case happens usually in USA or Canada market where mortgage is extremely popular.

What is more, if you have a debt this is really terrible. Because your wage (consumer) or revenue (firm) is falling but your debt? No, he does not want to fall. So you have to pay the same debt with less money and this will cause again lower purchasing and higher unemployment.

In conclusion, deflation is a problem to economy as much as inflation. And now Europe has to solve this problem before it become like Japan.