Verðhjöðnun

Verðhjöðnun, also known as deflation, is a general decrease in the prices of goods and services in an economy over a period of time. It is the opposite of inflation, which is a general increase in prices. When deflation occurs, the purchasing power of money increases, meaning that the same amount of money can buy more goods and services than before.

Deflation can be caused by several factors. A decrease in the money supply or a contraction in credit can lead to less money circulating in the economy, thus reducing demand and driving down prices. A significant increase in the supply of goods and services, perhaps due to technological advancements or a surge in production, can also outpace demand and cause prices to fall. Additionally, a decrease in aggregate demand, often triggered by economic uncertainty, a decline in consumer spending, or a reduction in government expenditure, can contribute to deflationary pressures.

While a fall in prices might seem beneficial for consumers in the short term, prolonged or severe deflation can have negative economic consequences. Businesses may see reduced profits, leading to cuts in production, layoffs, and a general slowdown in economic activity. Consumers might delay purchases, anticipating further price drops, which further depresses demand. This can create a deflationary spiral, where falling prices lead to reduced economic activity, which in turn leads to more price falls. Governments and central banks often take measures to combat deflation, such as lowering interest rates or increasing the money supply, to stimulate economic growth and maintain price stability.