Understanding deflation

Understanding deflation is important because it can disrupt economic balance and affect people’s livelihoods. Deflation occurs when prices in an economy drop over time. It is the opposite of inflation, where prices rise. Although inflation happens often, deflation is rare but often more harmful due to its extended negative effects on economic growth. Each year, around 5% of countries face deflation, usually for a short period, mostly in less developed nations. However, even strong economies like those of the US, UK, Japan, and Canada experienced deflation in the past. The main cause of deflation is weak demand for goods and services. For example, during the Great Depression in the US, many people had little money to spend, and banks had limited funds to lend. The government and central bank were not able to increase spending or add more money to the economy, which further reduced demand. As a result, prices fell, leading to deflation.