deflation
/ dee-FLAY-shun /
Falling prices sound wonderful — who would not want everything to get cheaper? But imagine you run a shop and notice that everything you sell is worth a little less each month, while the loan you took out stays exactly the same size. Customers, sensing prices will be lower next month, wait to buy. Sales slump, you cut wages or staff, those people spend less, prices fall further. That downward spiral, the opposite of inflation, is deflation, and it can be far more dangerous than mild inflation.
Deflation is a sustained fall in the general price level — a negative inflation rate. If the price index drops from 100 to 98 over a year, inflation is minus 2 percent: deflation of 2 percent. The mirror image of inflation, it means money gains purchasing power: the same dollar buys more next year. That sounds good for savers, but it is poison for borrowers, because debts are fixed in money terms while incomes and prices shrink, making every loan harder to repay in real terms.
Economists fear deflation because it can become self-reinforcing and is hard to escape. When people expect prices to keep falling, they postpone spending and investment, which weakens demand and pushes prices down further — a deflationary spiral, as seen in the Great Depression and in Japan's "lost decades." It also blunts central banks, since interest rates cannot easily fall below zero. This is precisely why policymakers aim for low positive inflation rather than zero — a small buffer against ever tipping into deflation.
If shoppers expect a TV to be cheaper next month, they wait. Enough people waiting means shops cut prices to sell stock, which confirms the expectation — and so the cycle repeats. Falling prices that feel like a bargain can quietly freeze an economy.
Cheaper prices sound great until everyone stops buying and waits.
Deflation is not the same as disinflation. Deflation means prices actually fall (negative inflation); disinflation means prices still rise, just more slowly.