Downside of deflation  Let me ask two basic questions. Why is deflation problematic, and why did the Bank adopt an inflation targeting policy? Deferring spending and decline in aggregate demand Deflation, which can be defined as a persistent decline in prices, causes economic stagnation through several routes (Chart 1).
First, if prices decline persistently, one can purchase more goods and services with the same amount of money as time passes. In other words, the value of cash and deposits will rise simply by hoarding them; thus, firms and households will defer their investment and spending. Consequently, this will lead to a decline in aggregate demand.