Deflation

• Deflation

  • Overview

    • Deflation is a sustained fall in the general price level. It differs from disinflation, where prices keep rising but at a slower rate, and from a single item becoming cheaper.
    • Falling prices can raise the purchasing power of money, but widespread expected price declines can weaken spending and investment. Debts fixed in money become harder to repay as prices and incomes fall.

  • Context

    • The U.S. experienced broad price declines after World War I and during the early years of the Great Depression. The Federal Reserve describes persistent weak demand and expectations of further price declines as conditions that can contribute to deflation.
    • The practical contrast with Inflation is not simply that one helps buyers and the other hurts them. The breadth, pace, expected duration, and causes of a price change matter.

  • Source

    • Federal Reserve: Historical approaches to monetary policy discusses the economic effects of deflation, including its effect on debt repayment and the limits of interest-rate cuts.