Deflation

Falling prices might seem like good news for consumers, and in some cases they can be, for example when technology makes products cheaper to produce. But widespread, persistent deflation is usually a sign of economic weakness and can cause serious problems.

When people expect prices to keep falling, they may delay purchases, waiting for lower prices. This reduces demand, which leads businesses to cut prices, production and jobs further, creating a downward spiral.

Deflation also increases the real burden of debt. If prices and wages fall, but the amount owed stays the same, debts become harder to repay. This can lead to more defaults and financial stress.

Central banks generally try to avoid deflation, which is one reason many target a small positive inflation rate, often around 2%, rather than zero. Fighting deflation can be difficult, especially when interest rates are already close to zero. Japan experienced long periods of low inflation and mild deflation from the late 1990s, which became a widely studied example of these challenges.