Marana, Arizona
I know what you’re thinking when you see your grocery bill or your rent statement: “I just want prices to go back to what they used to be.” Trust me, I get it. Nobody likes watching their paycheck disappear faster at the checkout line.
But I need to level with you about something most people don’t realize – and honestly, it’s not what you want to hear. Getting those lower prices you’re wishing for? That could actually destroy your financial life far worse than high prices ever could.
I know that sounds crazy. Groceries are up 25 percent over five years. Housing has jumped 30 percent since 2020. Your car, your energy bills, your healthcare – everything costs more. Even President Trump just rolled back tariffs on coffee and bananas trying to bring down grocery prices after inflation hammered his approval ratings.
So how could lower prices possibly be bad? Here are the facts.
When Lower Prices Become an Economic Crisis
The phenomenon economists fear is called deflation – a sustained decline in the general price level of goods and services. While it might sound appealing at first glance, deflation can trigger decreased consumer spending, declining business investment, and economic stagnation.
The reason is psychological and economic. When consumers expect prices to keep falling, they delay purchases – why buy today when it’ll be cheaper tomorrow? This waiting game causes businesses to see reduced demand, forcing them to cut prices further to attract customers. Lower revenues mean companies can’t invest in growth or new products, leading them to freeze hiring or lay off workers. The unemployed then have even less money to spend, creating a downward spiral that’s exceptionally difficult to escape.
When businesses sell goods for lower prices, they earn less profit and may cut wages or lay off employees and spend less on innovation. This creates what economists call a deflationary spiral – a self-reinforcing cycle where falling prices breed economic weakness, which causes prices to fall further.
Japan’s Cautionary Tale
The most striking example of deflation’s dangers comes from Japan, which spent decades trapped in what economists call the “Lost Decades.” Following an asset bubble burst in 1991, Japan entered a deflationary period that proved nearly impossible to reverse.
Over the period from 1995 to 2025, Japan’s nominal GDP fell from $5.55 trillion to $4.27 trillion, while real wages fell around 11 percent. The country’s share of global GDP plummeted from nearly 18 percent to just 3.6 percent over three decades.
The human cost was staggering. From their peak in 1997, real wages fell around 13 percent by 2013, with household incomes in 2010 dropping to 1987 levels. An entire generation grew up with diminished economic opportunities, facing stagnant wages and limited career prospects.
Why couldn’t Japan simply escape? Because deflation increases the effective debt loads of corporations and raises real interest rates and real wages, depressing corporate profits and restraining business investment. When prices fall but debts remain fixed, the real burden of those debts actually increases. Companies found it safer to hoard cash than invest, creating economic paralysis.
Only recently, after decades of struggle and aggressive monetary policy, has Japan begun to see sustained inflation above 2 percent – ironically aided by the global inflation surge of 2021-2023 that other countries were trying to combat.
The Debt Trap Deflation Creates
One of deflation’s most insidious effects is how it magnifies debt burdens. Whether you’re a household with a mortgage, a business with loans, or a government with bonds, deflation means you’re repaying debt with money that’s worth more than when you borrowed it.
Unanticipated deflation leads to substantial transfer of resources from debtors to creditors, but creditors don’t benefit fully as the increased debt burden, compounded by falling collateral value, contributes to defaults and diminished loan recovery value.
For governments, this creates a fiscal nightmare. Deflation increases the real debt burden while revenues decline alongside a contracting nominal GDP, even as expenditures continue to rise. Japan’s experience illustrates this painfully: despite running fiscal deficits since 1991 to stimulate the economy, the country now carries a debt-to-GDP ratio exceeding 240 percent.
Why Retailers Won’t Simply Lower Prices
When people demand lower prices, they’re typically imagining a world where their purchasing power increases while everything else stays constant. But that’s not how deflation works in practice.
Retailers and businesses don’t voluntarily reduce prices unless forced to by weak demand – the kind of weak demand that typically accompanies high unemployment and economic recession. As one economist noted, prices generally don’t go backward once they’ve risen. There are exceptions for volatile commodities like eggs (which spiked due to avian flu then retreated) or gasoline (subject to supply manipulation by OPEC+), but these are temporary fluctuations, not sustained deflation.
Even Trump’s recent tariff rollbacks on foods like coffee and beef are unlikely to bring immediate price relief. The food and commodities that have risen in price were purchased and imported under higher tariffs and stored in warehouses, so consumer price relief will take time. The inventory already sitting in warehouses was bought at higher prices, and those costs still need to work their way through the system.
The Goldilocks Zone of Inflation
What economists actually want is what they call “Goldilocks inflation” – not too hot, not too cold. The Federal Reserve targets roughly 2 percent annual inflation for good reason. This level is low enough that it doesn’t significantly erode purchasing power or create hardship, but high enough to provide several crucial benefits:
It gives businesses room to adjust wages and prices without nominal cuts, which workers resist psychologically even if real wages stay constant. It provides central banks ammunition to fight recessions by cutting interest rates (you can’t cut rates if they’re already at zero). And it reduces the real burden of debt over time, making it easier for borrowers to manage their obligations.
When inflation is stable and predictable, consumers, companies, and governments can make long-term spending and investment decisions with less uncertainty.
Current Risks and Warning Signs
While the United States isn’t facing imminent deflation, economists are monitoring warning signs. Deflation is often linked to weak demand, tighter monetary policy, or productivity gains, and can signal economic stagnation.
Some concerning trends have emerged globally. China has experienced a steep fall in producer prices extending an unparalleled 31-month deflationary streak, raising concerns about deflationary pressures being exported to other economies through cheaper Chinese goods.
The challenge for policymakers is navigating between the Scylla of excessive inflation and the Charybdis of deflation. Both can inflict serious economic harm, but deflation has proven particularly difficult to combat once established because traditional monetary policy tools become ineffective when interest rates approach zero.
The Bottom Line
The next time you find yourself wishing for lower prices, remember that you’re really wishing for something more specific: you want your wages and income to rise faster than prices, improving your real purchasing power. That’s very different from wanting actual price declines across the economy.
Getting what you think you want – falling prices – could trigger a cascade of job losses, wage cuts, business failures, and mounting debt burdens that would make today’s inflation look mild by comparison. As terrible as inflation feels, the alternative of sustained deflation would likely feel far worse.
The goal isn’t to make prices fall. It’s to make incomes rise faster than prices do, allowing your purchasing power to gradually improve without destabilizing the entire economic system. It’s less dramatic than the price rollbacks politicians promise, but it’s the only path that doesn’t lead to economic catastrophe.
