Meaning of Deflation (What is, Concept and Definition)

What is Deflation:

Deflation refers to the decrease in the general price level in an economy .The word comes from the French deflation , which in turn comes from English deflation.

Deflation occurs as a result of a situation in which supply exceeds demand, which causes producers to see each other forced to lower the prices of products and services.Deflation, in this sense, is the opposite of inflation.

See also Inflation.

According to the Monetary Fund International (IMF), we can consider a situation of falling prices as a deflation if it is maintained for at least two consecutive semesters.

The problem of deflation is that the fall of Prices also end up affecting wages and production, all of which, added together, can lead to a recession that seriously damages the growth of an economy.

See also Recession.

Why does this happen? Because deflations cause consumption to stagnate, producers produce less, which in turn implies that they dispense with some of their workers and there are layoffs of workers, a situation that in turn affects less consumption and, in Consequently, an excess of supply, all of which becomes a vicious circle known as a deflationary spiral.In this sense, the consequences of deflation are more fearsome than those of inflation.

An example Deflation was the Great Depression that took place in the United States between 1929 and 1933 as a result of the collapse of the financial system.

Advantages and disadvantages of deflation

Advantages

• People's purchasing power will increase if wages remain stable.
• Companies may choose to invest more in capital goods.
• Stimulates savings.
• There is more money available for loans.
• There are downgrades in the tip of interest.

Disadvantages

• Companies could start investing less in workers, triggering unemployment.
• The fall of prices can also affect wages, employment and production.
• Consumption tends to stagnate: less occurs because less is consumed and, consequently, layoffs occur.

Deflation and inflation

In economics, it is convenient to differentiate between two totally opposite processes such as inflation and deflation. Inflation is the general rise in the assets of consumption, which in turn results in the loss of purchasing power. deflation , on the other hand, implies a generalized drop in prices and an increase in purchasing power.

Both, however, if they get worse, can have dire consequences for the economy, such as galloping inflation or hyperinflation in the case of the former, or a deflationary spiral that can lead the economy to recession, in the case of the second.