It only really causes a problem if you don't prepare your economy for it. Prices should really only drop for commodity products and basics, so that one can live for $100/month. You should still offer incentives for people to spend more, such as offering higher end real-estate and products, or just bringing in more people into your economy.

I causes people to delay spending and horde rare goods (gold etc) it also has massive problems if say 90% of your populations mortgages are underwater see Japan

What mechanism causes this deflation for commodities and basics? How much of the economy is basics?

Efficiency and automation reduces commodity prices.

Just transporting food is a huge cost. Get transport costs down and you reduce food costs.