Published May 15, 2023 Deflation is a sustained decrease in the general price level of goods and services in an economy. That means prices for many goods fall over an extended period of time. In this regard, deflation is the opposite of inflation, which is the sustained increase in prices. Deflation may occur when demand for goods and services decreases while the supply remains stable, or it may be caused by a decrease in the money supply by the central bank. One example of deflation occurred during the Great Depression in the 1930s. The stock market crash in 1929 led to a decrease in consumer spending and investment, resulting in a deflationary spiral. Businesses lowered prices to attract customers, but consumers held off purchases, expecting further price declines. As a result, the economy fell into a deflationary cycle, leading to high unemployment rates and low economic growth. Another example of deflation is the ongoing trend in Japan’s economy since the 1990s. The country has experienced deflation for several decades, and the government has been trying to combat it through various measures, such as quantitative easing and fiscal stimulus. The deflation has been caused by several factors, including an aging population, a high debt-to-GDP ratio, and a decrease in exports due to competition from other Asian countries. Deflation can have severe consequences for an economy, such as lower consumer spending, weak investment, higher unemployment rates, and a decrease in economic growth. A decrease in prices may sound like a good thing, but it can create a cycle of declining demand and decreased production, leading to economic stagnation. Therefore, central banks often try to prevent deflation by increasing the money supply, lowering interest rates, and implementing other measures to boost aggregate demand. It’s also essential for policymakers to identify the root causes of deflation and address them effectively to prevent long-term economic damage.Definition of Deflation
Example
Why Deflation Matters
Macroeconomics