Deflation is the phenomenon where the inflation rate is persistently negative over a period of time. Deflation is commonly associated with deep recessions, and is a scenario that central banks want to avoid at all cost as it is difficult to bring an economy out of deflation. This is because when most prices are decreasing, consumers delay purchases because they believe they can buy the same goods more cheaply in the future. This depresses aggregate demand, causing prices to further decline in a downward spiral.
See also: Disinflation« Back to Index