Inflation has been a stressful reality for many Americans recently, having a marked impact on consumer budgets. But with inflation rates finally slowing, and the threat of a recession in the news, deflation is also a phenomenon many should prepare for.
Deflation, or a decline in prices of goods and services across the economy, might seem like good news after dealing with high prices for so long. However, the trend is typically accompanied by job loss, poor investment return and other side effects.
The good news is this: Preparing your finances for deflation involves many of the same good financial habits as preparing for inflation does. Those financial moves include shoring up your emergency savings and carefully choosing investments.
What Is Deflation and Why Is It a Risk to Your Finances?
“Deflation is when the general prices of goods and services start to fall and typically a sign of an economy that is weakening,” says Andrea Woroch, consumer and money-saving expert and U.S. News contributor.
At the moment, however, the U.S. is still experiencing inflation, albeit at a rate that has shrunk from recent highs.
Historically, deflation is triggered by a recession and low consumer spending, says Tom Graff, head of investments at Facet. So despite the fact that Americans may be a ways off from deflation, the threat of an impending recession has many worried about the phenomenon.
Deflation is a sign of a poor economy, but it has both negative and positive effects on the average individual.
“It can be good because it gives people more purchasing power, which can stimulate the economy. However, companies and businesses will have to reduce production to offset loss in profits which can be followed by layoffs and liquidations,” Woroch says.
Graff adds that the value of your assets is likely to decline and your income could go down.
How to Prepare for Deflation
Americans can take several steps to prepare for deflation, even if it isn’t currently an economic reality. Consider these steps:
- Build emergency savings.
- Consolidate debt.