IT might sound like a strange thing to say, but falling prices aren't always a good thing, writes Robert Little of chartered financial planners Bob Little & Co Ltd.

There’s been lots of discussion in the news recently about some countries’ efforts to combat falling prices – officially referred to as “deflation”.

Japan’s post-war economic miracle was followed by a “lost decade” from 1991 to 2000 that led to misery for millions.

Now Japan is potentially on the brink of yet another period of deflation, while European ministers are exploring methods of jump-starting the economy before the same issue becomes a tangible concern closer to home.

To understand why economists and governments are so concerned, we should perhaps start by looking at what deflation is.

A developed economy normally experiences rising prices each year, better known as “inflation”.

This is measured by taking a basket of different goods (such as rail fares and utility prices) and comparing the cost of each over time.

If an economy starts to experience falling prices (meaning most goods are now cheaper than they were last year), you’ve got deflation.

And as the Japanese know only too well, the trend can be extremely difficult to reverse.

This is all down to perfectly rational behaviour of people like you and me. For example, imagine you’re considering buying a car and then find out that prices are falling.

Naturally, you’d consider putting the purchase off for six months to drive away the same car for less. But if everyone does this it will cause demand to fall for no real reason - people aren't walking more or using alternative transport, they’re just deferring their spending plans.

After six months you find prices have dropped due to falling demand, but instead of being tempted to buy, you continue waiting in case the car becomes even cheaper.

Unless something happens to buck this trend, companies might decide to cut their workforces.

Then, as these newly-unemployed consumers tighten their belts, there will be even weaker demand, and so prices continue to plummet.

Because it’s so difficult to stop this vicious cycle, governments try to cut it off at the pass at the first signs it’s on its way.

As European economic growth has now virtually ground to a halt, there’s some risk deflation could be just around the corner, so policy makers are now considering how to inject a much-needed boost to stave away this threat.

This might not be good news for penny-pinchers in the very short-term, but should be widely welcomed by the rest of us in the medium and long-term.

Robert Little is director of chartered financial planners Bob Little & Co Ltd, of Kirkleatham Business Park, Redcar.