The danger of deflation is (a) its self-fulfilling prophesy, i.e., consumers delay their spending since they expect the prices to continue to fall and this perpetuates economic downturn. (b) the central bank has limited ammunition against deflation. As inflation rate falls the real interest rate increases: r = i – \pi , which intensifies economic contraction by raising the real cost of borrowing. The central bank can cut the nominal rate, i, down to zero! Further cuts are not common. Hence while inflation has a solution, deflation does