Deflation is both a sign of economic weakness and a real danger.  In a weak, no growth economy there is no pressure on prices, little demand for most goods or services and flat to falling wages as unemployment rises.  Falling prices signal spreading economic malaise.

Deflation can be a greater danger – when prices fall, just about everything except for cash is worth less; cash is worth more because each dollar buys more.  In effect, dollars are more expensive.  A borrower needing money to repay a loan must work longer and harder to repay the loan because his labor is worth less. This debt-deflation spiral can send an economy into a deep recession or worse.  This is why the ECB and others fear deflation.

This article was written by David Blitzer, chairman of the index committee, S&P Dow Jones Indices.

© S&P Dow Jones Indices LLC 2013. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to SPDJI. This material is reproduced with the prior written consent of SPDJI. For more information on SPDJI, visit http://www.spdji.com

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