Deflation
A sustained fall in the general price level — the opposite of inflation — that can signal a collapsing demand environment.
Deflation occurs when the general price level falls persistently. While cheaper prices sound appealing, deflation is often a symptom of collapsing demand: consumers delay purchases expecting prices to fall further, corporate revenues shrink, and debt burdens grow heavier in real terms.
Central banks fear deflation because conventional monetary policy becomes less effective — cutting rates to zero still cannot stimulate spending if expectations are anchored negatively. Japan's "Lost Decades" are the textbook deflationary case study.
Related Terms
Disinflation
A slowdown in the rate of inflation — prices still rise, just more slowly — distinct from deflation, where prices actually fall.
IntermediateInflation
The rate at which the general price level of goods and services rises, eroding purchasing power over time.
BeginnerInterest Rate
The cost of borrowing money, set or influenced by central banks — the single most powerful lever in macroeconomics.
BeginnerMonetary Policy
Central bank actions — rate changes, asset purchases, reserve requirements — designed to control inflation and support employment.
BeginnerQuantitative Easing (QE)
A central bank's large-scale asset purchases that inject liquidity into the system and push down long-term interest rates.
IntermediateRecession
A significant economic contraction — commonly defined as two consecutive quarters of negative GDP growth — that hits corporate earnings and risk assets hard.
Beginner