What is Deflation?

What is Deflation?

Deflation is a sustained decline in the general price level of goods and services. It increases the real value of money but can harm growth by encouraging consumers to delay purchases.

Causes of Deflation

• Demand shock: Sharp drop in spending or investment.
• Excess capacity: Supply outpaces demand.
• Debt deleveraging: Households and firms pay down debt instead of spending.
• Monetary contraction: Tight credit conditions reduce money supply.

Monitoring Deflation

• Core inflation data: Watch for persistent negatives.
• Bond yields: Falling yields signal deflationary concerns.
• Central-bank tone: Listen for discussion of negative rates or asset purchases.
• Growth indicators: Weak GDP and employment reinforce deflation risk.