Yea or Nay: Can Prices Be Too Low? The Threat of Deflation
As The Budget Fashionista, I love low prices, especially on items in which I could get an amazing cost per wear. However, while reading Time.com, I came across an article discussing what happens when prices become too low. Now, I must admit, I never really thought about prices ever being too low. Maybe this is because for the past, oh, 20 years, prices have been ridiculously high (a $12,000 crocodile handbag by Coach?) or television shows like Access Hollywood telling us that an $87 dress for a 5-year-old is “budget” friendly. Don’t even get me started on the continued influx of celebrity “designed” fashion lines.
Regardless, the threat of extremely low prices, aka “deflation”, is a very real issue. According to the Investment Dictionary, deflation is “A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.” In real people terms: extremely low prices can lead to lower profitablity which can lead to unemployment which can lead to less money to spend which leads to low prices.
So can our quest for low prices actually be bad for our pocket books? Is there such a thing as TOO low prices?
(note: I’m not an economist, but it would seem that if we had more money, i.e. higher wages, then high prices wouldn’t be as much of an issue).
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December 2, 2008 sarai wrote:
Re: (note: I’m not an economist, but it would seem that if we had more money, i.e. higher wages, then high prices wouldn’t be as much of an issue).
I am not an economist, either, but I did major in economics. Higher wages are fine, but only if there is demand to back it up. If companies are having trouble like many are in the current market, boosting employees’ income (such as by raising the minimum wage) would make the situation even worse, as the companies would have to react by cutting jobs to control their costs. Then we’re worse off than before.