How Deflation Affects Your Money

Dave Carpenter, AP Personal Finance Writer

CHICAGO (AP) — Deflation is the potential new boogeyman for consumers, replacing inflation.

Absent in any significant way since the Great Depression, deflation — a prolonged period of downward-spiraling prices of goods and services — is seen as a possible threat after three straight months of falling prices.

Lower prices might sound appealing, making the cost of everything from cars to food to vacations cheaper. But prices decline because of a lasting drop in demand, which also means employers lower wages and consumers slow spending. It's a combination that can drag down an economy for years.

The fear is going the way of Japan, which has battled periods of deflation for two decades. The country still hasn't recovered from its "Lost Decade" of the 1990s, when bubbles in the stock and real estate markets burst and the economy fell into years of recession and stagnation.

The danger doesn't appear imminent. The Federal Reserve has signaled it's ready to take the necessary steps to prevent anything similar occurring here. And the chances of deflation receded somewhat with the disclosure that the consumer price index edged up 0.3 percent in July.

Still, the slight rise hasn't erased the issue because concerns remain about a double-dip recession.

Consumers wondering what it would be like need look no further than the housing market, which has been in steep deflation for four years. "It's much easier to tame inflation than it is to derail deflation once it gets started," says Diane Swonk, chief economist at Mesirow Financial Inc., a Chicago-based financial services firm.

Over the next three to five years, she says, it's a greater risk than inflation.

Here are some points for consumers and investors to keep in mind if deflation occurs:

If you liked this article you might like

Counterfeit Toys Are a Consumer Rip-Off -- And Health Hazard to Children

Obamacare Contraception Mandate Woes Continue

Cannabis Colleges Educate Budding Ganjapreneurs

4 Things to Avoid Before Closing on a House

Why 401(k) Savers Are Like Bad Boyfriends