Deflation

• Deflation is a prolonged and widespread decline in prices that causes consumers and businesses to curb spending as they wait for prices to fall further. It is the opposite of inflation.
• It should not be confused with disinflation, which merely describes a slowdown in the rate of growth of prices. Deflation may occur at the wholesale or retail level. It may result for demand side or supply side reasons.
• Deflation is hard to deal with because it is self-reinforcing. Deflation needs to be checked with
• Keynsian stimulus or it can breed deeper deflation, leading to what is known as a deflationary spiral.
• When an economy experiences ‘deflation, demand from businesses and consumers to buy products goes down because they expect to pay less later as prices fall further. With crashing demand, Producers can not to sell and go bankrupt, unemployment rises reducing demand further. That causes deflation to become even more aggravated. It makes it more expensive to service existing, debts. As debt becomes unserviceable, the risk of default and bankruptcy rises too and bank becomes reluctant to lend as their own NPAs rise.

Source: Sriram’s IAS