There is Chinese inflation data due this weekend – CPI and PPI for January 2025 | Forexlive

Deflation—when prices decline over time—can be harmful to an economy for several reasons:

1. Delayed Spending and Investment – Consumers and businesses may postpone purchases and investments, expecting prices to fall further. This weakens demand and slows economic activity.

2. Rising Debt Burden – Since wages and incomes typically decline during deflation, the real cost of repaying debt increases, making it harder for households and businesses to manage their obligations.

3. Lower Corporate Profits – As prices drop, businesses earn less revenue, which can lead to cost-cutting measures such as layoffs and reduced investment, further weakening the economy.

4. Higher Unemployment – Declining revenues force companies to cut jobs, increasing unemployment and reducing consumer spending, creating a vicious cycle of economic contraction.

5. Monetary Policy Challenges – Central banks typically use interest rate cuts to stimulate growth, but if rates are already low, they have limited tools to combat deflation effectively.

Overall, deflation can lead to a downward economic spiral, reducing growth, discouraging investment, and increasing financial instability.