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Deflation (economics)

Deflation in economics refers to a decrease in the general price level (i.e. a decrease in the nominal cost of goods and services as well as wages). Hence, it is an opposite to inflation.

Deflation is generally regarded negatively in that it is usually a symptom of a depression or severe recession. In a deflationary situation, people tend not to spend money because they are expecting prices to drop, which causes factories to close, which causes prices to drop, which causes people not to spend money, etc. Also, deflation causes people to hold on to cash rather than to invest the money. These adverse effects of deflation are arguably due to rigidities in the economy: If wages, prices and interest rates adjusted seamlessly to deflationary expectations, they would have no real economic effects.

Examples of deflation include the Great Depression and the economy of Japan during the 1990s. There was also a slow decline of the general price level in the late 19th century. During this time the gold standard was in use and known gold stocks were growing less rapidly than production. As a result, gold became more expensive in terms of goods, that is, a drop in the price level. This phenomenon ended with the discovery of gold reserves in South Africa and Alaska. With World War I, countries began to move away from the gold standard.

Table of contents
1 Causes
2 Tools to fight deflation
3 Deflation in the United States
4 Deflation in Japan


Deflation may be due to several reasons :

Tools to fight deflation

Basically, governments and central banks try to make consumers to buy more and save less. They can:

Deflation in the United States

There have been two significant periods of deflation in the United States. The first was after the Civil War. The second was between 1930-1933 when the rate of deflation was approximately 10 per cent/year.

Deflation in Japan

Deflation started in the 1990s. The Bank of Japan and the government did not succeed in getting rid of deflation, although interest rates are near zero. The reasons for deflation in Japan are:

See also: