Deflation
What It Is
Deflation is a sustained decline in the general price level of goods and services.
Why It Matters
While falling prices may seem positive, deflation can lead to reduced spending, lower profits, wage cuts, and economic contraction.
How It Happens
- Weak demand
- Excess capacity
- Falling wages
- Declining credit growth
- Debt burdens rising in real terms
Key Components
- Negative inflation rates
- Lower consumer spending
- Debt deflation
- Economic stagnation
Example
Japan experienced prolonged deflation during the 1990s and 2000s, known as the “Lost Decades.”
Key Takeaways
- Deflation discourages spending and investment.
- It increases real debt burdens.
- Central banks aim to avoid deflation at all costs.