Q. If deflation means that prices are lower, why is it bad for the economy? A. The effects of deflation, a sustained fall in the general price level, are substantially the reverse of those of inflation. Unanticipated deflation is costly to bearers of long-term debt—borrowers—because the dollars they pay back are more valuable than those they borrowed, i.e., those dollars have more purchasing power. Thus, creditors benefit at the expense of debtors. In addition, owners of assets may find that the value of their assets has decreased, thus decreasing their wealth.
Q. Wouldn’t anyone gain from deflation? A. Those with fixed money incomes would find their real incomes enhanced even without a change in their nominal incomes. And savers would find the purchasing power of their savings has grown—assuming those savings are in fixed-value monetary assets—because of the falling prices of goods and services.
Q. So, some people are better off and some worse off during periods of deflation? A. The fact that any given family may be an income earner, a holder of financial assets, an owner of real assets and a holder of debt simultaneously would probably cushion the redistributive impact of deflation. If the family owns fixed-value monetary assets such as savings accounts, deflation would increase their real value. As a holder of debt, a family would be repaying that debt with more valuable dollars. In addition, that same deflation may decrease the real value of any property assets such as a house or land that the family owns. Thus, many families could be simultaneously hurt and helped by deflation.
Q. Is deflation worse than inflation? A. Both deflation and inflation cost the economy in terms of output. Both also hurt business investment and may adversely affect families. The Federal Reserve is committed to maintaining price stability because it is necessary for sustainable long-term economic growth.

The content for Q & A was largely adapted from In Plain English, a St. Louis Fed publication.