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What is Deflation?

Illustration of coins and a red downturned arrow on a pink background showing deflation
Source: Freepik

Understanding the country’s ever-changing economy, including the housing market, inflation, deflation, and how the Federal Reserve works, is incredibly confusing for the average American. So we’re going to take on one of these important economic terms, deflation, and find out precisely what it means and how it’s affecting Americans today.

Deflation is the decrease in the average price level of goods and services. It happens when the national inflation rate falls below 0%. Essentially, inflation decreases the value of currency, whereas deflation increases it. It’s vital to understand that, typically, deflation occurs within specific industries or products, while inflation is happening to others; this reality creates a healthy economy in which residents pay a little more for some things and a little less for others and can, therefore, continue to afford their lifestyle.

According to David Harrison from the Wall Street Journal, for the past five months, the price of “durable goods,” such as appliances, furniture, and used cars, have been consistently decreasing. Harrison explained, “What does [durable goods deflation] mean for the economy? Well, it’s a good sign. The fact that we have these prices falling will offset the ongoing increases in services.” He continued to note that “groceries are 20% more expensive than before the pandemic,” so while citizens will still be paying the big bucks at the grocery store, they will save money on items that last, such as cars and home necessities.

Now, while deflation may sound like quite a miracle, as everyone loves it when prices go down, the truth is that unchecked deflation causes extreme economic issues. First, it’s important to know that deflation occurs when there is less demand, and Harrison explains that it is usually a sign of a recession as people simply aren’t buying some of the products they used to. So if prices are low, it’s because people are making purchases, which will lead to a national economic crisis.

Currently, Harrison reports, Americans shouldn’t be overly worried about another rescission. The Federal Reserve usually tries to keep the inflation and deflation rate at about 2%, and while last November, that number rose to 3.2%, it’s now, with deflation on durable goods, making its way back down to the 2% spot. And financial experts like Harrison are guessing that the Federal Reserve won’t raise the rates again in the near future.

Many Americans have reported that they haven’t personally noticed this reported deflation, as their costs of living are still much higher than they were before the pandemic. And, in theory, they’re not wrong. If citizens are spending so much on their groceries that they can’t afford to buy a car, furniture, or new appliances, they won’t necessarily see the lower costs of these items.

However, Harrison believes that this decrease in costs for certain items is still a good sign for Americans and the national economy, at least for now. The inflation rate will hopefully find it’s way back to 2% and sit there over the next few years.

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