Many economists regard deflation as more dangerous than inflation, as it encourages consumers to delay purchases as they wait for a lower price tomorrow. When consumers put off buying in anticipation of lower prices it creates a downward spiral of lower demand followed by lower production.

Deflation harms debtors as well. Countries like Greece have to pay back the money they borrowed with money that will be more expensive next year. Paying down debt with cheaper money slows economic growth. Japan has struggled with deflation for the last two decades, as growth in Japan faltered.

A sign that deflation is near comes from countries like Ireland and Spain that saw prices fall in May. Inflation was below 1 percent in five other euro zone countries.

There are four causes of deflation:
Decrease in the money supply
Increase in demand for money
Increase in supply of goods
Decrease in demand for goods Read the rest of this entry »