[di-fley-shuh
n] 
| 1. | the act of deflating or the state of being deflated. |
| 2. | Economics. a fall in the general price level or a contraction of credit and available money (opposed to inflation ). Compare disinflation. |
| 3. | the erosion of sand, soil, etc., by the action of the wind. |
| de·fla·tion (dĭ-flā'shən) n.
|
Deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.
Investopedia Commentary
Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.
Related Links
All about Inflation Tutorial
Formulating Monetary Policy
Why the CPI Is a Friend to Investors
See also: CPI, Disinflation, Federal Reserve Bank, Hyperinflation, Inflation, Inflationary Psychology, Monetary Policy, Money Supply, Reflation, Stagflation
deflation
| deflation (dĭ-flā'shən) Pronunciation Key
The lifting and removal of fine, dry particles of silt, soil, and sand by the wind. Deflation is common in deserts and in coastal areas that have sand dunes. |