The problem of deflation, a sustained fall in overall prices, was complex and not readily apparent to the average consumer. Prices were stable in 1986, and in 1987 the cost of living index actually dropped, albeit by less than 0.5 percent. The greatest drops were in housing, food, fuel, and utility costs. Although consumers preferred deflation to the double-digit inflation of the early 1980s, deflation had ominous implications for an economic downturn. Because import costs rose during 1987, average domestic prices fell significantly, as much as 10 percent for some goods and services. Total prices declined by 0.5 percent. Insofar as growth in domestic demand had contributed some 60 percent of manufacturing growth, business and industry began to suffer. Companies that had incurred dinar-denominated debts at high interest rates, expecting to repay their loans with inflated currency, were expected to suffer even more. The low interest rates that disinflation, a reduction in inflation, implied could spark even greater capital flight and lower remittances. Increased government spending would revive aggregate demand but would entail more external borrowing.

Data as of December 1989