Published on Feb 13, 2026 • Updated on Aug 6, 2026
This article was written by Adem Tumerkan
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Could deflation be the next major risk for investors? While it remains a lower-probability outcome, record debt, slowing wage growth, aging populations, AI-driven productivity, and falling asset prices could create powerful deflationary pressure. In a debt-heavy economy, even modest price declines can weaken incomes, raise real debt burdens, and amplify financial stress.
Could deflation be the next big risk for investors?
That may sound hard to believe after the inflation shock of the last several years (and now the ongoing Iran war sending prices surging). But while inflation was the obvious threat coming out of 2020, the more underappreciated risk today may be deflation.
To be clear, deflation is not my base case. It remains a lower-probability outcome. But macro analysis is not about repeating the consensus. It is about identifying the risks the market may be overlooking.
And if inflation was the obvious risk after COVID, the question now is simple: what comes next?
I believe deflation deserves far more attention than it is getting.
Over the last several years, inflation made complete sense. Governments ran massive deficits and spending programs. Central banks flooded the system with liquidity. Supply chains were impaired while demand surged. Fiscal expansion, monetary expansion, and constrained supply all pointed in the same direction.
But those forces are no longer aligned. Some have faded. Others are beginning to reverse.
That does not mean deflation is imminent. It does mean the balance of risks may be changing.
Deflation is not a temporary discount or weakness in one part of the economy.
It's a broad and sustained decline in prices across much of the economy - usually driven by weak demand relative to supply. And in a credit-based system, that can become deeply problematic.
Why? Because falling prices do not just lower costs for consumers. They also weaken revenues, squeeze profits, reduce wages, increase the real burden of debt, and put pressure on growth.
That is what makes deflation so dangerous. In a heavily indebted economy, even mild deflation can create feedback loops that are very hard to stop.
At a high level, deflation tends to emerge when demand weakens while supply capacity remains strong.
In other words, when spending slows but production does not - prices slump lower.
And today, there are four major forces that can create that setup.
One of the most important causes of deflation is excessive debt.
As I’ve detailed before in Debt Cycles 101: Why Credit Drives Economic Growth, debt increases demand and the money supply. Thus, when households and businesses borrow, they spend more and its inflationary.
But over time, that debt must be repaid.
Put simply, when debt levels are high:
U.S. household debt recently hit record levels (almost $19T)1. And in a highly leveraged economy, slower credit growth means slower demand.
Put simply, all this debt effectively steals from future consumption.
Rapid productivity gains can be heavily deflationary.
Why? Because when companies produce more with fewer inputs - they become more efficient. Thus, unit costs fall and wage pressures ease.
And if output grows faster than spending, excess supply builds up and pushes prices lower.
This has pulled down wages. And when wage growth slows, one of the main pillars of inflation weakens (because people have less to spend).
That’s not always bad - but it is deflationary.
Demographics are a structural demand driver.
Younger populations tend to borrow, spend, and form households. Whereas older populations tend to save more and consume less.
Today, many developed economies - including the U.S. - are aging rapidly.
Taken together – that means fewer people working. And fewer people means weaker structural demand for houses, cars, goods, etc.
And that naturally weighs on prices over time.
So, how are U.S. demographics today?
Well, they’re the weakest they’ve been since the peak of the COIVD pandemic. In fact, it’s the weakest we’ve seen outside the pandemic in over twenty years3.
Either way – if fertility rates remain anemic (they look to continue decelerating) and immigration further slows, we can expect the population to decline. And thus, higher deflation risks.
Another powerful deflation driver is falling asset prices.
See, many modern economies are asset-dependent. Meaning that household wealth, debt markets, and economic growth are heavily tied to assets and financial markets.
Thus, when asset prices rise, people feel wealthier - and they spend more (this is known as the wealth effect).
But when asset prices fall:
People feel poorer. Spending slows. Demand drops.
In that sense, collapsing asset prices are a form of deflation themselves.
And in an economy where consumption drives roughly two-thirds of GDP and debt plays a major role, that wealth effect reversal isn’t trivial.
So, you may be thinking,
“O.K., but what’s wrong with deflation? I’d love for my costs to drop.”
I hear you. And as someone who buys things – I agree.
But remember - there are always two sides to a coin.
The problem is that we live in a credit-based system. Today, the total value of financial products and debt is significantly larger than the actual "stuff" the world produces.
In a system like this, even a tiny bit of deflation can trigger a "feedback loop" that amplifies until the whole thing spirals.
The early 20th-century economist Irving Fisher called this “debt-deflation.”6
Fisher developed this theory after watching the debt-fueled implosion that triggered the Great Depression. He realized that depressions happen when debt levels stay high while asset prices and spending collapse. This creates a cycle where the very act of trying to pay off debt actually makes the debt harder to pay - leading to plunging spending, unemployment, crashing asset prices - and repeat.
Here is how that spiral actually works in the real world.
When people expect prices to keep falling, they often delay purchases. Why buy today if something may be cheaper next month?
That behavior may seem rational for the individual, but at scale it becomes destructive. Businesses see weaker demand and cut production. Then they cut investment. Then they cut jobs.
As unemployment rises and confidence falls, spending weakens further. Missed debt payments increase. Credit conditions tighten. Asset prices come under pressure.
What began as a minor slowdown in demand can turn into a self-reinforcing cycle.
This is the heart of Fisher’s theory. In deflation, your debt doesn't shrink - but your income does.
Economists call this a rise in "Real Interest Rates."
Meaning - even if the bank charges you 0%, the fact that money is becoming harder to get means the "cost" of your debt is effectively going up.
Thus, you have less money to spend on everything else.
People liquidate everything to raise cash. Prices of assets collapse. Defaults rise, credit vanishes, and the spiral tightens.
As mentioned above, deflation squeezes revenues. Businesses cut costs. Layoffs rise. And wages stagnate - or even decline.
And that burden won’t fall evenly.
It hits workers, small businesses, and net-debtor households hardest - essentially the bottom 80%.
Why? Because lower wages reduce disposable income and weaken consumption. But they also widen inequality - squeezing the middle class even further.
See, higher-income households rely more on assets and capital income - think dividends, interest, investments. They tend to save more than they spend (hence why they’re rich). Thus, even though asset price declines would hurt them, they have cash ready to step in and buy distressed assets.
Whereas lower-income households rely mostly on wages. Have limited savings. And they carry more liabilities as a share of income.
To put this into perspective - over the past three decades - the bottom 80% of U.S. households have seen their share of national income steadily shrink - while the top 20% now capture more than 70% of total income.
In fact, breaking it down further, the bottom 80% earn less than a quarter of national income (down from 37.6% in 1990 - yet still carry nearly half of household debt.
That’s a serious imbalance.
Because mass consumption depends on the middle and lower classes.
But if their income share shrinks while their debt burden rises, the system becomes increasingly dependent on credit just to sustain their spending.
And as Hyman Minsky - one of my favorite economists - warned, private debt cannot expand forever (read my write up on this here).
Eventually, debt burdens exceed income capacity. Spending must drop. Unemployment rises. Asset prices sink.
And that reinforces the debt-deflation spiral.
Central banks are decent at fighting inflation - they just raise rates to cool things down. Fighting deflation is much harder.
When interest rates hit zero, the Fed loses its main tool. This is called a "Liquidity Trap." Cutting rates doesn’t help if people are too scared to borrow.
Look at China right now. They’ve cut rates repeatedly, but households are still dealing with falling home prices, weak wage growth, and unemployment. Taking on any more debt feels like another trap.
This is what we call "pushing on a string." You can provide the credit, but you can't force people to borrow.
And when that fails, central banks often turn to things like Quantitative Easing (QE – “money printing”).
But QE mostly pumps up the price of stocks and real estate. It can make the markets look healthy while the real economy - the one you and I live in - continues to struggle (this is why we see weak economic data send markets higher usually, because it implies more easing to come - juicing up prices).
Inflation was the obvious risk after 2020. But deflation may be the next underappreciated one.
In a less leveraged economy, falling prices might seem manageable or even helpful. But in a world built on debt, asset values, and confidence, deflation can become far more dangerous than it first appears.
That is why investors should not dismiss it.
Rare does not mean impossible. Few expected China to struggle with deflation after reopening. Few believed Japan would spend decades trapped in it. Few imagined the boom of the 1920s would end in the deflationary collapse of the 1930s. And few expected the housing bubble to nearly break the global economy in 2008.
Markets have a habit of underpricing the risks that feel least intuitive in the moment.
That is why deflation is worth watching now.
Why can deflation be harmful if prices are falling? Lower prices may initially help consumers, but prolonged deflation can weaken business revenue, wages, employment, and asset values. Because existing debts remain fixed, households and businesses may face heavier real debt burdens even as their incomes decline.
Could artificial intelligence cause deflation? AI could contribute to deflation by helping companies produce more with fewer workers and lower costs. If productivity and supply grow faster than consumer demand, businesses may have to reduce prices. The outcome depends on how quickly AI also creates new investment, income, and spending.
How does deflation affect investors? Deflation can pressure corporate earnings, wages, real estate, commodities, and highly leveraged companies. Cash and high-quality fixed-income assets may become more valuable in real terms. The effects vary depending on interest rates, debt levels, and the severity of the downturn.
What are the warning signs of debt deflation? Investors can watch for slowing wage growth, weakening consumer spending, tighter credit, rising loan defaults, falling asset prices, declining inflation expectations, and excess production capacity. Several of these signals appearing together may indicate that deflationary pressure is building.
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