Deflaatioon

Deflaatioon denotes a sustained decline in the general price level in an economy, resulting in a negative rate of inflation over time. It differs from a one-off price drop and from disinflation, which is a slowdown in the rate of inflation while prices may still rise. Deflaatioon can occur when demand weakens, real and nominal interest rates are high relative to output, or when productivity gains lower production costs more than demand increases. The debt-deflation mechanism, described by Irving Fisher, links falling prices to rising real debt burdens and reduced spending, potentially creating a deflationary spiral.

Deflation is typically measured by price indices such as the consumer price index (CPI) or the GDP deflator showing negative inflation for a period. Core measures exclude volatile items like food and energy to provide a view of underlying price trends.

Sustained deflation tends to raise the real burden of debt, delay consumption and investment, depress wages, and increase unemployment. It can also push nominal interest rates toward zero, limiting conventional monetary policy's effectiveness and creating a zero-lower-bound dilemma for central banks.

Policy responses often focus on stimulating demand and inflation expectations. Central banks may pursue expansionary monetary policy, including lower policy rates, asset purchases (quantitative easing), and forward guidance. Fiscal stimulus, targeted spending, and debt relief can support demand when monetary tools are constrained. Exchange-rate adjustments and structural reforms may also be used to influence inflation expectations and growth.

Historical episodes include deflation during the Great Depression in the 1930s and periods of prolonged or mild deflation in Japan's postwar era. In modern times, deflationary pressures have appeared in various economies during and after financial crises, underscoring the risk of falling prices even in large economies.