Bitcoins and Deflation


One aspect of Bitcoins I've not gotten my mind around yet is this: suppose when the market is free to choose what form of money it will use, it picks BTC predominantly. Suppose also that all 21M have been mined.
As suggested in Gold, Paper and Bits, that will mean that as productivity rises (I'd guess, by at least 5%, maybe 10%) prices will fall at the same rate, being denominated in BTC. That's called deflation and is unfamiliar to us.
When inflation prevails, it makes sense to buy stuff - to get rid of the currency before it loses value. But when the opposite takes place, would it not tend to motivate not buying stuff; to hang on to one's money for as long as one can so as to take advantage of its rising purchasing power?
If so, how does that affect the performance of the market? Perhaps it would slow growth down, and thereby remove the motivation. But that would mean BTC imposes a limit on growth, and that doesn't smell well.
Any ideas?