Deflation

A single price falling — say, televisions getting cheaper — is not deflation. Deflation means prices falling across the board, consistently, over months or years, as measured by indexes like the CPI. It sounds appealing — cheaper stuff — but economists generally fear it because it can trap an economy in a self-reinforcing spiral. If consumers expect prices to keep falling, they delay purchases, businesses lose revenue, cut wages and jobs, demand falls further, and prices drop more.

Japan experienced a prolonged deflationary period beginning in the 1990s, and it became a reference case for how difficult the condition is to escape. Central banks set inflation targets — often around 2 % — partly as a buffer to keep the economy away from zero and the deflation danger zone. When inflation falls toward zero, interest rates often hit their lower bound too, leaving policymakers with fewer conventional tools. You can read about how central banks respond to these dynamics in our guide on central banks and currencies.

Deflation is different from disinflation, which is a slowdown in the inflation rate while prices are still rising. Deflation means the rate goes negative — prices are actively falling. In financial markets, deflationary signals can weigh on equities and commodities while boosting the real value of cash and fixed-rate bonds. Asset markets historically have reacted differently to mild versus severe deflationary episodes, so the depth and duration of the price decline matters as much as the direction.