Deflation is a decrease in prices for goods and services over time, typically associated with a contraction in the supply of money and credit in the economy
. It is the opposite of inflation and can be caused by various factors, such as an increase in productivity, a decrease in overall demand, or a decrease in the supply of money and credit
. Deflation can have both positive and negative effects on the economy:
- Positive effects : Deflation can increase the purchasing power of consumers, allowing them to buy more goods and services with the same nominal amount of money
. It can also encourage consumer spending, as people can afford more with their existing funds
- Negative effects : Deflation can be a sign of a weak economy, as it may indicate a decrease in demand for goods and services, leading to layoffs and reduced business investment
. It can also lead to a decline in asset prices, such as stocks and real estate, as people may not be able to afford them with their reduced purchasing power
. In extreme cases, deflation can spiral into a downward cycle of decreasing prices and economic contraction, potentially leading to a depression
Deflation is measured using economic indicators like the consumer price index (CPI), which tracks the prices of a group of commonly purchased goods and services
. While a slight decrease in prices may spur consumer spending, broad deflation can discourage spending and lead to even greater deflation and economic downturns
