Definition
Deflation occurs when average prices across the economy fall over time. It differs from a temporary decline in one product or industry.
Political Dictionary
Deflation
Deflation is a broad decline in the general price level.
Why It Matters
Persistent deflation can increase the real burden of debt, delay spending, reduce business revenue, and contribute to unemployment.
How It Works
Price indexes are used to determine whether the overall price level is declining.
History
Severe deflation occurred during the Great Depression and has influenced modern central-bank policy.
Example
If prices and wages fall while debts remain fixed, borrowers may struggle to repay loans.
Common Misconceptions
- Deflation is always beneficial because goods cost less.
- Any sale or discount is deflation.
- Deflation automatically increases economic growth.
Related Terms
Related Topics
See Also