The deflation risk will weigh heavily on the Reserve Bank, which is required to target an inflation band of between 1 and 3 per cent, which it has been outside for two years.
The idea that falling prices are a bad thing for an economy can seem counter-intuitive. But the problem as economists see it – and as witnessed in Japan over the past 20 years – is that when people expect inflation to be consistently low or deflation takes hold this can create a recessionary spiral. Expectation things will become cheaper suppresses consumer spending and business investment. The two feed off each other as lower consumption forces businesses to contract and focus on costs. That can start to cost jobs.
A cheaper TV or overseas holiday doesn’t look so good if you’ve been laid off. NZ Herald