So why is very low inflation bad for the economy? Isn't it helpful when prices stay low?
Not when they barely budge. Here are some reasons:
When prices barely move, many people postpone purchases. Why rush, if the same price or lower will be available in six months? Collectively, these delays slow consumer spending, the economy's main fuel.
Too-low inflation raises the prospect of deflation a broad decline in prices, pay and the value of stocks, homes or other assets. Deflation can further restrain spending and even tip an economy into recession.
Retailers engage in harmful price competition. Big chains such as Wal-Mart, Best Buy and Bed, Bath & Beyond, for example, fought a brutal price war during the past holiday shopping season. Thirty-three retail chains cut their profit estimates for the final months of 2013, according to RetailMetrics LLC..
Low inflation leads many businesses to hoard cash. Higher inflation, by contrast, would erode the cash's value. So businesses would be more inclined to spend to hire or buy equipment.