Deflation
Definition
Deflation is a decrease in the general price level of goods and services, often signaling weak demand and economic slowdown.
Explanation
While deflation sounds beneficial (prices drop), it's typically harmful. Consumers delay purchases expecting lower prices, reducing demand and causing businesses to cut production and jobs. Debt becomes harder to repay as its real value increases. Japan experienced prolonged deflation in the 1990s-2000s.
Central banks fight deflation by lowering interest rates and using quantitative easing. Deflation is rare in modern economies, with inflation being the more common challenge.
Example
During the Great Depression (1929-1933), the US experienced deflation of about 10% annually, causing widespread business failures and unemployment.