How does that feedback loop work?

People not spending money decreases the velocity of money, which effectively reduces the money supply, causing deflation. Similarly, the drop in demand itself acts as a counter pressure to inflation by simple supply and demand.

Not only does this not make sense as a feedback loop, but until the 1970s, the economic consensus was that it was impossible to have both high inflation and a recession at the same time. This view was only overturned when it happened, and the phenomena came to be known as stagflation.