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Why lower gas prices and deflation are a bad thing?

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danisara
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Posts: 280


« on: December 26, 2008, 05:12:35 pm »

I hear some analysts saying that low gas prices and deflation are bad for our economy. Why?
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« on: December 26, 2008, 05:12:35 pm »

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steven
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Posts: 223


« Reply #1 on: February 05, 2009, 01:04:59 pm »

It is obvious. If consumers are expecting decreases in prices, they hold on with spending. If you expect that the car you want will be cheaper by 10% in two months, you won't buy it now. You will wait. And if the decline in prices continues, you might wait even further. So, decreasing prices or deflation put a brake on spending which drives the economy into depression.

But on the other hand, you can argue that you have more real money when prices fall, so you buy more. This is what is called Piggou Effect. Take a look here: Piggou Effect

But the truth is that the Pigou Effect was never statistically proven. The scenario in which prices fall and consumers stop spending happened in Japan during their deflation. This is also called liquidity trap, see here for liquidity trap

Cheers.
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