Deflation is an economic phenomenon characterized by a general decline in the price level of goods and services in an economy over time. It occurs when the [[inflation]] rate, which measures the rate at which prices change, falls below 0%, resulting in a negative inflation rate. Deflation is the opposite of inflation, which refers to a sustained increase in the general price level. Deflation can result from various factors, including: 1. **Decreased demand**: A decline in consumer and business spending can lead to an excess supply of goods and services, causing prices to fall. 2. **Increased productivity**: Technological advancements or improvements in production methods can reduce production costs, allowing businesses to lower their prices. 3. **Reduced money supply**: A contraction in the [[money supply]] or a decrease in the velocity of money (the rate at which money changes hands in an economy) can reduce the overall amount of money available to be spent, leading to lower prices. 4. **Global factors**: International trade, competition, and currency fluctuations can impact domestic prices, potentially leading to deflation. Deflation can have both positive and negative effects on an economy: ## Deflation positive effects - Lower prices can increase consumer purchasing power, encouraging spending and benefiting consumers. - Borrowers with fixed interest rates may benefit from deflation, as the real value of their debt decreases. ## Deflation negative effects - Deflation can lead to a deflationary spiral, where falling prices lead to reduced consumer spending, lower production, and job losses, which in turn lead to further declines in demand and prices. - Businesses may experience reduced revenues and profit margins, potentially leading to cost-cutting measures, layoffs, and reduced investment. - Borrowers with variable interest rates or nominal wages may suffer, as the real value of their debt or wages decreases. - Deflation can exacerbate debt burdens, as the real value of outstanding debt increases, making it more difficult for individuals, businesses, and governments to repay their obligations. Governments and [[central banks]] typically aim to avoid deflation by implementing monetary and fiscal policies that promote price stability and a low, stable rate of [[inflation]]. See also: [[✳️ Economics Dictionary]], [[✳️ Dictionaries Home]]