Deflation: basics

In short: Deflation describes a sustained decline in the general price level and is often considered economically more problematic than inflation. It can trigger a dangerous downward spiral of falling prices, reduced consumption, and rising unemployment.

In more detail: Falling prices sound attractive to consumers at first, but can drag the entire economy into a slump.

In detail

• Delayed consumption: When consumers expect prices to keep falling, they postpone purchases, which further dampens demand.
• Debt burden: Under deflation, the real value of existing debt increases, since incomes fall while loan obligations stay the same in nominal terms.
• Wage cuts: Companies come under pressure to cut wages, which further weakens purchasing power and reduces demand even more.
• Deflationary spiral: Falling demand leads to falling prices, which in turn hurts corporate profits and investment, reinforcing the downward spiral.
• Monetary policy limits: Central banks cannot lower base interest rates indefinitely below zero, limiting their ability to fight deflation.
• Historical examples: The Great Depression of the 1930s and Japan’s “lost decade” are well-known historical periods of deflation.
• Countermeasures: Expansionary monetary policy, government stimulus programmes, and targeted investment incentives aim to counteract deflationary tendencies (inflation-grundlagen, zentralbank-und-leitzins).