The Simple Dollar: Personal Finance 101: Deflation and You

"Why would deflation cause people to stop spending money? Think about it. Let’s say you were thinking about buying a new car, for example. The current price tag on that model was $20,000. However, you knew that deflation was at work and all prices were falling. Wouldn’t you think to yourself, “You know, I could just wait a year and that car would only cost me $19,000.”

Compare that to a situation with inflation. You see a car there for $19,000, but you know prices are going up. You can reasonably expect that next year the price of that car will be $20,000, so there is some push to buy that car now rather than later.

And that’s the key difference. Inflation encourages people to spend money now - deflation encourages people to choose to spend money later.

If a lot of people choose to spend their money later and not spend their money now, products go unsold. Because there’s no demand, manufacturers slow down production. Factories slow down. People get laid off - and then can’t spend money anyway. Retailers cut costs to try to attract buyers. And the cycle continues."