Deflation
A decrease in the general price level of goods and services, increasing the purchasing power of money.
Definition
Deflation is a sustained decrease in the general price level of goods and services, resulting in an increase in the real value of money. While falling prices might seem beneficial to consumers, deflation can be economically destructive. When prices fall, consumers delay purchases expecting even lower prices, reducing demand. Businesses earn less revenue, leading to layoffs and wage cuts, which further reduces spending — creating a deflationary spiral. Japan experienced prolonged deflation from the 1990s through the 2010s, resulting in decades of economic stagnation. Central banks fight deflation by lowering interest rates and increasing money supply. Deflation makes debt more expensive in real terms.
Related Terms
Inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
EconomyRecession
A significant decline in economic activity lasting more than a few months.
EconomyFederal Funds Rate
The interest rate at which banks lend reserves to each other overnight, set by the Federal Reserve.
EconomyGDP (Gross Domestic Product)
The total monetary value of all goods and services produced within a country in a specific period.