Deflation, or negative inflation, refers to a persistent fall in the general price level of goods and services.
It should not be confused with disinflation, which means that prices are rising but not as fast as before.
Fears of deflation are rising globally as the economic slowdown and the threat of a deepening recession hit the cost of raw materials. Singapore may be vulnerable due to the open nature of its economy.
Some analysts expect negative inflation in Singapore towards the second half of 2009.
Why is it important?
Policymakers fear deflation as it brings a severe loss of confidence, which creates expectations that prices of goods, services and other assets will grow cheaper by the?day. Households and firms will delay purchases in anticipation of prices falling further. This self-reinforcing nature of the deflation spiral causes spending throughout the economy to come to a halt.
In the case of the Great Depression of the 1930s in the United States, that led to widespread unemployment and bankruptcies. Japan's 'lost decade' of the 1990s - when it was mired in deflation - also dented national appetite for risk and investment.
Deflation also makes it more expensive for debtors to pay off their loans.
Take a company entering a period of falling prices, with a certain amount of debt on terms that compel it to pay 8 per cent interest every year. If it has to keep on slashing prices at which it sells its goods in order to remain competitive, then the 8 per cent interest rate becomes harder to bear.
So you want to use the term. Just say...
'High inflation caused by rocketing food and energy prices has given way to the emergence of an even more destructive economic threat, deflation.'
Gabriel Chen
This article was first published in The Straits Times on December 28, 2008.
