Deflation

Deflation, unlike its more commonly discussed counterpart inflation, refers to a sustained decrease in the average price level of goods and services in an economy. In other words, the purchasing power of money increases, allowing consumers to buy more with each unit of currency. While this might sound appealing at first, persistent deflation is regarded by economists as problematic. Falling prices can influence both consumer behavior, leading individuals to postpone purchases in anticipation of even lower prices and business decisions. This delay in both consumption and investment can trigger a downward economic spiral, reducing overall demand and stalling economic growth. It's important to distinguish between deflation and disinflation. Disinflation refers to a decrease in the rate of inflation, meaning prices are still rising but at a slower pace. Deflation, on the other hand, indicates that prices are actively falling and is sometimes called negative inflation. Disinflation can be compared to letting air out of a balloon gradually, whereas deflation makes the balloon actually shrink in size. Inflation signals a rise in the general price level and a reduction in the value of money. Each of these phenomena affects economies differently, but deflation uniquely carries the risk of prolonged recessions and greater uncertainty in economic planning. Deflation often occurs during economic downturns, especially when aggregate demand drops sharply. For example, during the Great Depression of the 1930s,