Deflation Definition
What is Deflation?
Deflation is a decrease in the price level of goods and services. It is the opposite of inflation, which is an increase in the price level. Deflation can be caused by a decrease in money supply or a decrease in demand for goods and services.
When prices are falling, people may delay purchases in hopes of finding lower prices later. This decrease in demand can lead to even lower prices, creating a deflationary spiral.
Deflation can be harmful to an economy because it discourages spending and investment. It can also lead to debt problems, as people owe more money in real terms (after adjusting for inflation).
What Causes Deflation?
There are two main causes of deflation: a decrease in money supply and a decrease in demand for goods and services.
A decrease in money supply can occur when the government increases taxes or decreases the money supply through quantitative easing. A decrease in demand can occur when consumers postpone purchases in anticipation of lower prices later on (the ‘wait-and-see’ effect). It can also occur when businesses reduce production due to falling demand.
