What is deflation?

Deflation is when the cost of goods and services goes down over a significant period of time. It's the opposite of inflation, so therefore happens when inflation drops below 0%.

Key takeaways:

What is deflation? Deflation is a term used in economics to describe a sustained decrease in the general price level of goods and services in an economy.
Deflation can be caused by a variety of factors, including a decrease in consumer demand, an increase in the supply of goods and services, or a decrease in the money supply.
Deflation can have a number of negative economic consequences, including a decrease in consumer spending, an increase in unemployment, and a decrease in business investment.
Deflation can also make it more difficult for individuals and businesses to repay debts, as the real value of those debts increases with deflation.

Where have you heard about deflation?

You will have heard about deflation in relation to a country going into recession. Notably The Great Depression of the 1930s in the USA, or Japan's economic slump in the 1990s.

What you need to know about deflation

A reduction in the cost of goods and services may seem like a positive thing for consumers, and it's fine if it's just a few of goods or services. But deflation is about the widespread decrease in costs for a relatively long period of time.

The problem is that it creates a vicious circle. This reduced price of goods and services leads to unemployment as businesses struggle to cope with falling profits. This in turn leads to reduced spending. And round the circle goes. It can also create a 'buyer's strike' as people hold off buying things until prices drop even further.