In a growing economy investors normally expect to see inflation – rising prices.
However when economic growth stalls the opposite is possible – deflation. This is where the overall cost of a typical basket of goods and services, measured in the US and Europe using the Consumer Prices Index, drops. This might sound like a good thing on the face of it as it means the average family is paying less to buy what it needs each month. However in reality it is anything but – it puts downward pressure on wages and discourages spending as people start to expect to buy things more cheaply by simply waiting. Delayed spending is bad news for firms’ profits expectations and ultimately jobs.