Question

Question 1

Deflation refers to the phenomenon of a negative inflation rate. (In 2004, the inflation rate was negative in Hong Kong and we say Hong Kong suffered deflation in 2004.) Many people regard deflation as bad. Can you explain why? Is deflation sometimes good (at least for some people)?

Answer 1

Deflation, or negative inflation is a sign of a weak economy going further down. This is because negative inflation means falling prices, which will reduce consumer spending and thus pull down GDP or economic growth.

This will lead to poor foreign business investment and thus economy falling down the growth chart and competitiveness on the world level.

However, looking at the other side of the coin, deflation can be good as lower prices (after very sharp inflation) would increase consumer purchasing power and might infact increase consumer spending and thus GDP.