INSIGHTSDeflation is an economic phenomenon characterized by a sustained decline in prices. It is typically measured by a decrease in the Consumer Price Index (CPI) or other price indexes. This decline in prices may arise from reduced demand, increased productivity, or a decrease in the supply of money. When consumers anticipate falling prices, they may delay expenditures, which can exacerbate the deflationary cycle and lead to lower economic growth.
An example of deflation can be observed during the Great Depression in the 1930s, where prices for goods and services fell sharply due to a severe drop in demand and widespread unemployment. Related concepts include disinflation, which is a slowing of inflation rather than a decline, and stagflation, a situation where inflation and unemployment rise simultaneously.