Deflation

AAA

DEFINITION of 'Deflation'

A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.

The decline in prices of assets, is often known as Asset Deflation.

INVESTOPEDIA EXPLAINS 'Deflation'

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.

Deflationary periods can be both short or long, relatively speaking. Japan, for example, had a period of deflation lasting decades starting in the early 1990's. The Japanese government lowered interest rates to try and stimulate inflation, to no avail. Zero interest rate policy was ended in July of 2006.

VIDEO

Loading the player...
RELATED TERMS
  1. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  2. Biflation

    The simultaneous existence of inflation and deflation in an economy. ...
  3. Hyperdeflation

    An extremely large and relatively quick level of deflation in ...
  4. Inflation

    The rate at which the general level of prices for goods and services ...
  5. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  6. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise ...
RELATED FAQS
  1. What can cause price deflation?

    Deflation, or negative inflation, is the decreases in the prices of goods and services throughout an economy. Deflation can ... Read Full Answer >>
  2. What is the difference between deflation and disinflation?

    Deflation is a decrease in general price levels of throughout an economy. If there is a higher supply of goods and services ... Read Full Answer >>
  3. What impact would deflation have on the national debt?

    Deflation is a scenario where there are falling prices of goods and services across the economy. Although the ability to ... Read Full Answer >>
  4. Are there any economic arguments in favor of deflation?

    Deflation is defined as a decline in prices across the economy. Common causes of deflation include reduced government or ... Read Full Answer >>
  5. Why does inflation increase with GDP growth?

    Reported gross domestic product is adjusted for inflation. The growth of unadjusted GDP means that an economy has experienced ... Read Full Answer >>
  6. What causes negative inflation or deflation?

      Deflation, or negative inflation, happens when prices fall because the supply of goods is higher than the demand for those ... Read Full Answer >>
  7. What is the difference between inflation and deflation?

      Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance ... Read Full Answer >>
  8. Is the cost of living adjustment (COLA) mandatory?

    A cost-of-living adjustment, or COLA, is a purchasing power protection mechanism provided to all monthly Social Security ... Read Full Answer >>
  9. What does deflation mean to investors?

    Before we delve right into the topic of deflation, it should be noted that the causes and effects of deflation are complex ... Read Full Answer >>
Related Articles
  1. Economics

    What is Deflation?

    Deflation is an economic term used to describe a period of declining prices for goods and services. Decreases in the money supply, government spending, consumer demand and business investment ...
  2. Economics

    Do Deflationary Shocks Help Or Hurt The Economy?

    Find out how deflationary shocks can both benefit and hurt consumers and businesses.
  3. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  4. Options & Futures

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  5. Mutual Funds & ETFs

    The Upside Of Deflation

    Deflation has continued to pop up throughout economic history - but is that such a bad thing?
  6. Options & Futures

    Trading The Gold-Silver Ratio

    This method may seem arcane, but many well-established strategies rely on it.
  7. Personal Finance

    The Lost Decade: Lessons From Japan's Real Estate Crisis

    Find out what America can learn from Japan's liquidity trap and credit crunch.
  8. Economics

    What’s Driving U.S. Stocks? Irony.

    A seesaw week for U.S. stocks ended on the upside last week, though the rally was more a function of slow growth rather than a booming economy.
  9. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  10. Taxes

    Will Itemized Deductions Get You A Bigger Refund?

    April and taxes are due soon. If you need to file your return, you might have to decide if itemizing your deductions this year will net you a better deal.

You May Also Like

Hot Definitions
  1. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  2. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  3. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  4. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  5. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
Trading Center