One of the distinguishing features of the Great Depression was marked deflation from 1930 – 1932, with prices falling precipitously (-30%) over that time.1 Deflation spiraled, and the stock market and investor portfolios tumbled with it.
With recent headlines citing deflation as a concern, we’re taking a moment to remind investors about the negative effects of deflation, its present-day risk in the global economy, and what steps investors concerned about deflation can take in their portfolios.
What is Deflation and How Does it Affect the Economy?
Deflation occurs when prices of goods fall on a broad scale, usually due to sharp declines of money in circulation or because of a big spike in the supply of goods with little supporting demand.2
The key phrase here is “broad scale.” The prices of flat screen TVs might fall year-over-year, for instance, but that’s more likely because of productivity gains and innovation within that sliver of consumer goods than it is a broad-scale economic issue.