verðhjöðunar

Verðhjöðnun, often translated as deflation, is a general decrease in the prices of goods and services in an economy over time. This is the opposite of inflation, where prices increase. Deflation can occur for a variety of reasons, including a significant decrease in the money supply, a decrease in demand for goods and services, or an increase in the supply of goods and services.

When prices fall, consumers may postpone purchases, expecting even lower prices in the future. This reduced spending can lead to lower production, job losses, and a general economic slowdown. Businesses may find it harder to make profits as their revenues fall, which can lead to reduced investment and further job cuts. In severe cases, deflation can contribute to a deflationary spiral, where falling prices lead to lower economic activity, which in turn leads to further price declines.

Central banks typically aim to avoid deflation and often use monetary policy tools, such as lowering interest rates, to stimulate spending and maintain a low, stable rate of inflation. While a small amount of deflation might seem beneficial for consumers, sustained or significant deflation is generally considered harmful to an economy. It can be a sign of underlying economic weakness and can make it more difficult for debtors to repay their loans.