deflation

Deflation is an economic condition characterized by falling prices. This is the opposite of inflation, where prices rise. While rising prices can erode savings and make goods unaffordable, deflation can be even more detrimental to an economy.1

A deflationary spiral occurs when people expect prices to drop further, leading them to postpone spending. This reduced demand forces companies to lower prices to attract customers, which in turn reduces their ability to invest and can lead to stagnation or business closures. Consequently, people lose jobs, further decreasing spending and demand, creating a cycle of economic decline. The Great Depression in the U.S. is a notable historical example of an economy severely impacted by deflation.1

While some economic policies, often termed "deflationary policies," aim to reduce aggregate demand to manage external payments, their effectiveness and social acceptability are debated.2