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Deflation

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Deflation Definition Glossary of Finance Terms - Deflation

Deflation : Deflation is a negative inflation rate and refers to a decrease in the overall price or cost of goods and services. While inflation reduces the actual value of money, deflation increases the value of each unit of currency but is usually seen as a negative result of a poor economy where there has been a decrease in the money supply and less credit lending. Where general prices may rise or fall, deflation is the actual shift of supply and demand in the economy of most goods and services.
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As demand falls, prices follow and as prices fall, often times consumers wait to purchase. This, in turn, reduces the ability for companies to produce products due to lack of funds. A reduction in finances leads to pay cuts, layoffs, and downsizing which often exacerbates the deflation problem. This feedback loop is considered a primary factor in the deflationary spiral.

Deflation can sometimes result in this deflationary spiral when demand decreases and prices drop, delaying most economic transactions, slowing down economic growth and investments. Deflation is sometimes the result of extended recessions or economic depressions where people are less inclined to spend money.

Also called : Deflationary Economy, Deflated.


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