deflation

A decrease in prices, often stated as an increase in the value of money, related to a decline in spending by consumers. (Compare inflation.)

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

A reduction in consumer or wholesale prices. The term generally applies to more than just a temporary decline. Compare inflation. See also disinflation.