Why deflation is not your friend

The newest buzzword in the economy is deflation. But if inflation is bad, deflation must be good, right? Not quite says AP Personal Finance Editor Trevor Delaney.

The D word emerged after reports this week that the the consumer price index (CPI) and the producer price index (PPI) both fell sharply last month. The CPI fell by 1 percent in October, the biggest one-month drop in the 61-year history of the index, according to the New York Times.

Meanwhile, the PPI decreased 2.8 percent in October, the biggest one-month decline on record, according to CNN.

That means prices at the wholesale and retail level are declining. Sounds like a good thing, but it's actually a sign of a weak economy.

It means businesses have been forced to slash their prices in order to lure customers back into the stores. But with a weak economy and low consumer confidence, will it work?

When businesses cut their prices, they don't make as much money from the goods and services they sell. If they don't make as much money, they may have to cut jobs and wages. If consumers lose their jobs, they won't buy things. And if consumers don't buy things, businesses may have to cut prices again, thus continuing the spiral. 

It's an uncommon economic condition in the U.S., Delaney explains. But it's raising real concerns among some economists.