Falling prices sound great — here's why economists are terrified of them

Deflation — when prices consistently drop — sounds like a consumer's dream. Everything gets cheaper! But economists consider it one of the most dangerous economic conditions.

Here's why: if you know prices will be lower tomorrow, you stop spending today. Why buy a car now if it'll be $2,000 cheaper next year? Multiply this by millions of consumers and businesses, and you get a collapse in demand. Companies cut prices further, lay off workers, which reduces spending even more. It's a deflationary spiral.

Japan experienced this for nearly two decades (the "Lost Decades" from the 1990s). That's why central banks target about 2% inflation — just enough to keep money moving without eroding purchasing power too fast. The Federal Reserve will tolerate temporary high inflation before accepting any deflation.