What is deflation?
Deflation in economics is a persistent decrease in the general price level of goods and services, when inflation is below zero percent, resulting in an increase in the real value of money – a negative inflation rate. When the inflation rate slows down (decreases, but remains positive), this is known as disinflation. It is a substantial drop in the price level. Inflation destroys real value in money. Deflation creates real value in money. Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level. Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods o
Deflation is a decline in price levels. It is the opposite of inflation in the sense that inflation usually leads to rising prices. However, while consumers may welcome a decline in price levels in one sense, deflation can be a very dangerous situation. Economies, in general, do not like severe inflation or deflation and both can be volatile situations fraught with worries. Just as inflation makes money less valuable, deflation makes money more valuable. As such, deflation can happen at times when interest rates are high and the lock on money is tight, thus creating a situation where there is a reduction in credit. In fact, there are four reasons why deflation can happen. Either there is an increased demand for money, an increased supply of goods, a decreased supply of money or a decreased demand for goods. The most common way to fight fears of deflation is likely for the national bank to increase the supply of money. In the United States, this job falls to the Federal Reserve. Most ot
But, defining the word is different than understanding the threat – because widespread public ignorance of the effects of deflation and the deflationary spiral makes deflation a menacing risk now more than ever. Define Deflation and Inflation Webster’s says, “Inflation is an increase in the volume of money and credit relative to available goods,” and “Deflation is a contraction in the volume of money and credit relative to available goods.” To understand inflation and deflation, we must understand money and credit. Define Money and Credit Money is a socially accepted medium of exchange, value storage and final payment. A specified amount of that medium also serves as a unit of account. According to its two financial definitions, credit may be summarized as a right to access money. Credit can be held by the owner of the money, in the form of a warehouse receipt for a money deposit, which today is a checking account at a bank. Credit can also be transferred by the owner or by the owner’s
