verðhjöðnunar

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, where prices rise. Deflation can occur when the supply of goods and services increases but the demand for them decreases, or when there is a significant contraction in the money supply.

There are several potential causes of deflation. A decrease in aggregate demand, often triggered by a recession, a tightening of monetary policy, or a significant drop in consumer or business confidence, can lead to businesses lowering prices to stimulate sales. Conversely, an increase in aggregate supply, such as through technological advancements that lower production costs or a surplus of goods, can also put downward pressure on prices. A reduction in the money supply, whether through central bank actions or a decrease in lending by commercial banks, can also cause deflation as there is less money chasing the same amount of goods.

Deflation can have significant economic consequences. While falling prices might seem beneficial to consumers in the short term, sustained deflation can lead to a deflationary spiral. Consumers may delay purchases, expecting prices to fall further, which reduces demand, leading businesses to cut production and lay off workers. This further reduces consumer spending and exacerbates the downward price pressure. Businesses may also find it harder to repay debts, as the real value of their debt increases, potentially leading to bankruptcies. Central banks and governments often aim to avoid deflation through monetary and fiscal policies designed to stimulate demand and maintain stable price levels.