Business Glossary

the opposite of inflation. A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending, or investment spending. Deflation has often had the side effect of increasing unemployment, since the process often leads to a lower level of demand in the economy. Other downside effects include possible pay cuts and more expensive repayment of consumer debts. The upside of falling prices is that mild deflation would assure working people (at least those who fend off pay cuts) of steadily rising real wages.

decline in the prices of goods and services. Deflation is the reverse of inflation ; it should not be confused with disinflation , which is a slowing down in the rate of price increases. Generally, the economic effects of deflation are the opposite of those produced by inflation, with two notable exceptions: (1) prices that increase with inflation do not necessarily decrease with deflation-union wage rates, for example; (2) while inflation may or may not stimulate output and employment, marked deflation has always affected both negatively.

decrease in the general level of prices, usually the result of an economic downturn brought on by tight money policies of the Federal Reserve System. Deflation may result from (1) tight money monetary policies causing a rise in interest rates and shrinkage in the money supply; or (2) changes in fiscal policy, such as increases in taxation. Deflation is not the same as disinflation , which is characterized by a lower growth in prices.

decline in the prices of goods and services . Deflation is the reverse of inflation ; it should not be confused with disinflation, which is a slowing down in the rate of price increases.