This weekend The Economist magazine published this article about developed economies and the likelihood that they will experience deflation in the next few months.
The article explains how deflationary pressures would be initiated because of falling commodity prices (known as “commodity-led deflation”). The article goes on to explain how deflation can lead to further deflationary pressure. How?
As deflation takes hold in the economy consumers who carry large debt burdens are faced with relatively more expensive obligations. As this happens they are less likely to buy goods and services dampening demand and putting further pressure on prices to move lower.
I originally discussed deflation and the impact it should have in lowering mortgage rates in this post back on November 2nd. We would expect mortgage rates to decrease as deflation becomes reality.