What is deflation?

"Deflation" is an economic situation in which the prices of goods and services fall across a wide front for a longer period, resulting in a general and sustained price decrease.

According to many economists, deflation can slow down the economy, because consumers tend to postpone their spending in the expectation that prices will fall further, and companies in turn postpone their investments. This can lead to a negative spiral of decreasing demand and falling production. Additionally, deflation increases the debt burden, because the value of debts relatively rises when prices fall, making it more difficult for companies and individuals to pay off their debts.

Deflation can arise when the production of goods and services increases while demand lags behind, or as a result of a financial crisis where prices fall due to a collapsing market. Although some forms of deflation, such as those caused by a falling oil price, are considered "good deflation," sustained, widespread deflation can be damaging to the economy.