Definition of deflation

A sustained fall in the prices of goods and services, and thus the opposite of inflation. Not to be confused with disinflation, which is a slowing down of price rises (a fall in the inflation rate). Deflation may be the result of government policy (such as a move to raise interest rates and cut money supply) or can be caused by external factors, such as intense trade competition or the collapse of an asset bubble. Deflation may have short-term benefits, particularly if it is the result of greater efficiencies in the economy, but if it lasts too long, or if it is the result of weakening demand, it can be a negative, self-perpetuating influence on economic activity, discouraging consumption, reducing revenue and wage levels, pushing up bad debts and increasing the rate of bankruptcy. The combination of deflation and a sustained drop in economic output is termed an economic depression. Also see recession.

 

deflation in the news

In April 2014 an FT writer argued that for Japan to really rise above its decade of deflation it would need to start awarding higher wages to workers. However, Japan's recovery had thus far not been visible in overall wage data.

Meanwhile, in the same month, deflation was looming in the eurozone. A struggle was emerging in the Eurozone over whether the European Central Bank could counter the threat of deflation with a European version of quantitative easing – a course of action viewed with deep suspicion in Germany.