deflation
A general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit.
Example
“Japan experienced prolonged deflation in the 1990s, making it hard for businesses to grow.”
Memory Tip
DE-flation — like deflating a balloon. Prices deflate (go down).
Why It Matters
Deflation matters because it affects the real value of money you have saved and the purchasing power of your income. If prices fall, your savings become worth more in terms of what you can buy, but it can also lead to job losses and wage cuts that hurt your earning potential.
Common Misconception
Many people think deflation is good because falling prices seem like a bargain, but it actually discourages spending and investment. When people expect prices to drop further, they delay purchases, which slows economic activity and can lead to increased unemployment and reduced wages.
In Practice
During Japan's lost decade in the 1990s, prices fell an average of 1 to 2 percent annually, and consumers postponed major purchases waiting for better deals. A house worth 300,000 dollars in 1995 might have dropped to 250,000 dollars by 2000, but wages also fell and jobs became scarce, making it harder for people to afford anything despite lower prices.
Etymology
From Latin 'deflare' meaning 'to blow away' — like letting air out of a balloon, prices shrink.
Common Misspellings
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