In a deflationary period, prices will drop, corporate profits will dry up, wages will shrink, and all of this will reinforce the conditions of recessions. This happens for two reasons.
The first is that deflation keeps money on the sidelines as consumers wait for prices to fall further. This causes demand to shrink.
Deflation also adds to the real value of debt. This makes consumers and businesses less likely to take out loans and make big purchases to grow the U.S.'s consumption-driven economy.
And deflation runs counter to the goals of most of the world's central banks. Most notably, the U.S. Federal Reserve.
"Central bankers want inflation so they can pay back inflated debt in cheaper dollars," said Money Morning Capital Wave Strategist Shah Gilani.
But as we start 2015, deflation has arrived. Just check out these four deflation indicator
1. Falling crude oil prices
2. Falling commodity prices
Heating oil futures are down 47%.
Natural gas futures are down 36%.
Copper futures are down 24%.
Unleaded gas is down 23%.
Soybean oil is down 15%.
Wheat futures are down 11%.
Corn futures are down 8%.
The other two I read somewhere but they were cut off in this article. I will have to look.
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