Deflation, the Boogie Man

Consumers like a good deal right? They like to get the best price for the product they are after and are typically willing to shop for it, especially since the Great Recession. It would seem on the surface that deflation is a positive circumstance. It isn’t. The problem with deflation is our economy is primarily consumption driven. Consumer spending accounts for 70% of our nations GDP. If prices start to fall people are more apt to put off major purchases because they feel they can get the same product later at a discount. When spending drops, so do corporate revenues, companies then feel pressure to cut costs, which leads to layoffs and other personnel cutbacks. Companies are likely to freeze salaries or even cut pay for those workers remaining. Dwindling income makes consumers even more leery about spending money, worsening the whole cycle.

At the moment deflation is a very real concern. The U.S. inflation rate dropped from 2% in July to 1.7% in August and will probably come in lower during the rest of the year because plunging oil prices will lower the cost of gasoline and other products affected by petroleum or energy costs.

The only way to stop the Boogie Man is by making borrowing super easy and inexpensive. Will lower rates be the result?

The Troll

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