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The drop in demand caused by deflation has serious consequences for a country’s economy. Because: If the sales and profits of the companies decrease, these companies react to the underutilization of their capacities with layoffs. Unemployment rises. Due to higher unemployment, consumption in society continues to fall, so prices only fall even more.
Deflation is dangerous because it creates a vicious circle of falling prices, falling demand and economic contraction that is difficult to break. The central bank can lower the key interest rate in order to increase the demand for credit and thus increase consumption. However, the key interest rate can be reduced to a maximum of zero percent, after which the central banks’ options are exhausted.