Glossary
Deflation
A sustained fall in the general price level, the opposite of inflation, which can raise real debt burdens and delay spending.
Deflation is a broad, sustained decline in prices across an economy, so that the Inflation rate turns negative. A single product getting cheaper, like televisions, is not deflation; it means the average price of goods and services, as measured by an index such as the Consumer Price Index (CPI), is falling month after month.
Why central banks fear it
Cheaper prices sound good, but persistent deflation can feed on itself:
- Spending is delayed. If a car will cost less next year, buyers wait, demand falls and companies cut prices and jobs further.
- Debts get heavier. Loans are fixed in dollars, while wages and profits fall. The real burden of every mortgage and corporate bond rises.
- Monetary policy runs out of room. With prices falling, even a 0% policy rate is a positive real rate, and a central bank cannot easily cut much below zero.
Historical cases
The US experienced severe deflation in the early Depression: consumer prices fell roughly a quarter between 1929 and 1933, alongside mass bankruptcies and unemployment. Japan had mild but stubborn deflation for much of the period from the late 1990s to the early 2010s, along with weak growth. Brief dips in CPI, such as in 2009 when energy prices collapsed, are usually not called deflation because they do not last.
Deflation versus disinflation
Disinflation means inflation is slowing but still positive, for example falling from 6% to 3%. Prices are still rising, just more slowly. Most "falling inflation" headlines are about disinflation, not deflation. The Federal Reserve aims for 2% inflation partly to keep a buffer above zero.