Deflation is the opposite of inflation. When you experience deflation, the costs of goods actually decrease instead of going up. This means that the prices go down, and while it may sound like a good thing—who doesn’t want to save some money—it can actually have a very negative effect on the economy. Although the dollar does have more buying power, the cost to produce the goods may not go down. People will often hold onto their cash instead of spending it, waiting for the prices to continue to drop. It can lead to an even slower economy and larger spread deflation of goods and services.
In a time of deflation, businesses may cut back on producing, which means they need fewer workers, and it can lead to layoffs. This can cause the negative spiral that makes it difficult for an economy to begin to recover and grow. The last prolonged period of deflation in the United States was during the Great Depression. During times of deflation many people have a difficult time finding a new job, which means that recent college graduates may be entering a workforce that does not have any available positions. It can make it difficult for young people starting out.
When you are in a deflation, you need to be prepared for a possible job loss. It is not a good idea to have debt during a deflation, so you may want to prepare for a deflation by working to get out of debt. You may want to work towards becoming more independent through your savings, and finding ways to earn extra money or to cut back on your expenses. Even though the value of items is going down, many people will wait to buy something because the prices tend to continue to decrease.
Deflation can lead to a depressed economy, but it is easier to deal with then hyperinflation where the value of the dollar decreases rapidly and makes it difficult to purchase anything with the money that you do have. The key to managing your money in most economic situations is the same whether the economy is doing well or not. You need to create a monthly budget, and spend less then you earn. You need to work to get out of debt, and put money into savings on a regular basis. This will allow you to ride out most of the economic turmoil without it affecting you too much. The people who struggle the most in difficult economic times are the ones who are struggling to make ends meet each day. The best way to stop worrying about your money is to reach a point where you are living paycheck to paycheck. You can do this by establishing an emergency fund and getting out of debt.
Other than getting your finances in order, there is not much you can do as an individual for a period of deflation. It is important to think about this as something that will last for several years. You will need to be prepared to deal with difficult economic times for the next several years, after the onset of a deflation, because it can take time for the economy to recover. If you look back at the history of the economy, there are periods of growth and periods where there is not growth or very little growth. If you are thinking about long-term investing strategies, you will understand that the market will have time to recover and grow from where it currently is. Once you get closer to retirement age, you will want to be more conservative with your investments. This will allow you to handle any adverse economic conditions without worrying too much.