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Deflation hits the USA

Economic growth, Financial Events
By Paul Hodges on 16-Apr-2009

US consumer prices fell for the first time since 1955 last month. Deflation was more common before 1955, and in the 1929-33 period prices fell by c10% a year.

The danger of deflation is that it changes the entire psychology of purchasing. With inflation, it is better to buy today, because the product/service will be more expensive tomorrow. But with deflation, one can postpone the purchase as it will become cheaper with time. Thus demand slows, and profits come under major pressure.

Today’s news provides further support for the blog’s October suggestion that “Prudent CEOs and CFOs will need to develop contingency plans for this depressing prospect”.