Falling Prices: Does This Cause Purchases to Be Delayed or Speed Up? Evidence From the Gasoline Market

Abstract

When teaching macroeconomics, students intuitively know why macroeconomists stress the dangers of inflation, but question why economists will say deflation is worse. To explain macroeconomists will almost always point to Japan’s “Lost decade”, a spiral of declining economic activity intertwined with declining prices. Their claim is that the deflation was a principle driver for the deepening recession as declining prices could cause consumers not to purchase more (as the law of demand would normally expect) but rather less in anticipation of even lower prices to come. This paper looked at the empirical evidence from the energy sector, specifically gasoline sales during the 2013-2015 time period and verified that there is evidence that some US consumers did indeed delay purchases even if they ultimately bought more.