What is deflation?

Deflation refers to a decrease in the general price level of goods and services within an economy. It signifies a period where prices are falling rather than rising, contrasting with inflation, which indicates rising prices. A range of factors can contribute to deflation, such as a decrease in consumer demand, an oversupply of goods and services, or tightening of the money supply. This phenomenon can lead to a reduction in consumer spending as individuals and businesses may anticipate further price decreases, thereby potentially slowing economic growth and leading to adverse economic conditions. Understanding deflation is crucial because it can affect monetary policy decisions and economic strategies.