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John Fong and his wife almost bought a home in a middle-class Vancouver neighbourhood this summer. But after putting in their conditional offer, they decided to shelve the purchase.

Speculation was already swirling about falling housing prices, and friends were encouraging them to hold off. The couple, who own a townhouse in nearby Burnaby, withdrew their offer.

"Both of us feel really good about that," the 36-year-old accountant said. "We think that prices will decline even further. ... We'll look again in the spring and summer of next year to see where prices are at that time. We would hope that prices have decreased about 10 per cent or so. And then we may reconsider."

Canadian housing bears little resemblance to the devastated U.S. market, where prices have fallen off a cliff and continue their downward trajectory. But the same consumer and business instincts have taken hold in both countries: If prices are going down, why not wait?

That attitude - combined with the deepening slump, strenuous efforts to reduce the vast amounts of debt sloshing around the economy and a strong aversion to risk stemming from the stock-market plunge - is helping to pave the way for a deflation threat, the most destructive and hard-to-fix of all economic calamities.

"Consumer behaviour is deflationary. There's no question about it," said Vitaliy Katsenelson, director of research with Investment Management Associates in Denver.

Mr. Katsenelson's own buying habits are evidence of that. He has put off purchasing a $300 Ping-Pong table for his children in the belief the price will come down.

"My behaviour has been deflationary," he said. "I'm going to wait until after [U.S.] Thanksgiving."

Deflation, defined as prolonged declines in prices across a wide range of goods and services, is not yet crushing the battered global economy. But central bankers around the world are aware that it is lurking just off stage. That explains why they have been tossing aside their old worries about inflation, slashing interest rates and printing money quickly.

Governments that fail to prevent deflation face years of dismal economic performance, soaring unemployment and pessimistic consumers and businesses that don't spend, economy watchers warn.

But a deflationary trend is already rearing its head in entire segments of the economy - and not just energy and other commodities, whose prices are coming down from hugely inflated levels. Price declines are also showing up in such areas as autos, electronics, clothing and a slew of other goods that consumers will be buying much less of in coming months as economic prospects dim and jobless rates rise.

Already, consumer electronics have seen big price drops. At Future Shop, the price of a 40-inch television has been reduced about 17 per cent since September. At Best Buy, Future Shop's parent company, a flat-panel 37-inch LG television is now selling for about $900, compared with $1,200 as recently as August.

Canadian consumers are recognizing good deals and picking up products, spokespeople for both chains said. "We've been really working hard with our partners, recognizing that customers are wanting better pricing," said Future Shop spokeswoman Susan Kirk.

But that's not enough to entice Mr. Fong. With all the dire economic news, he is also holding off on purchasing big-ticket items, including a car.

"It's just that a lot of those things will decrease in price," he said.

Deflation doesn't necessarily follow consumer caution. Rather, it is the consumers' approach to spending that matters. For those watching their savings implode in the stock market, there's a natural hesitancy to avoid forking out top dollar for high-end goods.

"It's not hard to demonstrate that people stop participating [in spending] if they have come off recent losses in the markets," said Michael Mauboussin, who teaches finance at Columbia University in New York.

And they are reluctant to put any more cash into stocks.

"People aren't writing cheques. They're fine with keeping what they have in right now, but they just don't want to put any more money in," said Mike Morrow, an investment adviser in Thunder Bay.

That's because expectations have turned sour, and that's governing their broader spending patterns.

"It isn't what the [inflation or deflation] rate is, it's expectations of the direction that determine how people allocate capital," said Arthur Heinmaa, managing partner with Toron Capital Markets in Toronto.

And once in place, they are hard to change. "The dark side of deflation is just horrible. You can always take away inflation. But once deflation gets ingrained, you're in a big pickle," Mr. Heinmaa said.

It's too early to call this a deflationary period, insists Jayson Myers, president of the Canadian Manufacturers and Exporters.

"I think it's the volatility in pricing that's happening right now," he said. "The volatility feeds into the cautious nature of consumers and businesses, because you don't know what the dollar is doing or what your costs are or what your competitors are doing almost on a day-to-day basis. It's very difficult to make any purchasing and investment decisions."

Nevertheless, what's going on in response to the credit crisis and rapidly slowing economies around the world is a broad reduction of debt, which has a deflationary impact because the amount of money circulating shrinks.

Most Canadians and Americans have not worried about inflation taking off in recent years, because of a justified belief that their central banks would do something about it.

But deflation would present a much tougher problem.

In recent decades, only Japan has fallen victim to the ravages of prolonged deflation. And the lessons learned by the Japanese have not been lost on policy makers elsewhere.

Despite slashing interest rates to zero and pouring money into the economy, Japan saw consumer prices decline for most of a decade starting in 1995, the longest such spell in any industrialized country since the Depression. The country only narrowly avoided a full deflationary spiral, in which tumbling prices translate into lower production, leading to lower wages and shrinking demand and another round of falling prices.

This time around, such a scenario is not probable, at least in the near term, said Allen Sinai, president of Decision Economics Inc. in New York. Indeed, real wages are still relatively stable in Canada and other industrial countries.

But he cautioned: "I couldn't say we won't get the seamy side of the possible 1930s-like scenario of a prolonged period of very weak demand."

With a report from Rob Carrick in Ottawa

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SEGMENTS OF THE ECONOMY AFFECTED BY FALLING PRICES

HOUSING

The national average price for existing homes for the year to Oct. 31 fell 9.9 per cent. Inflated home prices and economic uncertainty have cooled the housing market.

MUTUAL FUNDS

Investors Dividend, the country's largest widely available mutual fund, fell 16.9 per cent for the year to Oct. 31. Generally, prices of all stocks, including typically conservative dividend-paying blue chips such as the ones this fund holds, have plunged in value in the past year.

OIL

Oil prices yesterday hit a low of $48.50 (U.S.) a barrel, the cheapest in more than three years and about two-thirds below the record high of $147.27 set in mid-July.

ELECTRONICS

Retailers have been cutting prices for televisions and computers. At Future Shop, the price of 40-inch televisions has fallen about 17 per cent since September.

CARS

Prices for new vehicles in Canada have tumbled 7 to 9 per cent, according to Statistics Canada. But people were still buying more, with sales for October up 1.5 per cent over the same period a year ago.