Deflation (economics)

In economics, deflation is a decrease in the general price level, or a rise in the purchasing power of money with respect to a large class of consumption goods or services. Inflation is the opposite of deflation.

Related Topics:
Economics - Inflation

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Deflation should not be confused with disinflation which is a slowing in the rate of inflation, that is, the general level of prices are increasing at a decreasing rate.

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The 'general price level' is comprised of the price of wages, consumption goods and services

Related Topics:
Wage - Goods - Services

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In the recent years, economists have also started to use the term inflation and deflation in relation to assets, such as stocks and housing (production goods). Indeed policies designed to fight inflation in goods, services and wages, have seemed to spur stock and housing price inflation, or asset bubbles.

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During deflation, while consumers can buy more with the same amount of money, they also have less money coming in as wages. Consumers and producers who are in debt, such as home mortgage holders, also suffer because while their income drops, their payments remain constant. Central bankers worry about deflation, because many of the tools of monetary policy become ineffective as the inflation rate drops to zero or turns negative, and deflation can set off a deflationary spiral, where businesses refuse to invest, because the risk of investing is higher than holding currency.

Related Topics:
Central bankers - Monetary policy - Deflationary spiral - Risk - Currency

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