Deflation

(MoneyWatch) 

Which is worse: inflation or deflation?

Given the choice, most economists would take their chances with inflation. Before getting into why, two quick definitions: "inflation" is a decrease in the value of money, which leads to rising prices; "deflation" is just the opposite: a period of falling prices.

Inflation can cause problems, to be sure. Even modest inflation shrinks the buying power of your paycheck and your savings, and severe price increases make it hard for businesses to plan. But mild inflation encourages immediate spending and investment, helping the economy to grow.

Deflation, on the other hand, can initiate a vicious cycle that winds up hobbling the economy. You put off spending because you figure you'll get more for your money if you wait, and the drop in demand forces companies to lower prices even further. Meanwhile, companies expecting to get lower prices for their wares cut production and lay off workers — depressing wages and pushing down demand even more. Such a deflationary spiral was a major contributor to the Great Depression.

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