Deflation refers to a sustained decrease in the general price level of goods and services in an economy over time. It is the opposite of inflation. During deflation, the purchasing power of money increases ó meaning consumers can buy more with the same amount of money. However, while this may sound beneficial, persistent deflation is often a sign of economic weakness.

Deflation usually occurs when aggregate demand (overall demand for goods and services) falls short of aggregate supply. This decline in demand can stem from reduced consumer spending, lower business investment, or tight monetary policies. As prices fall, companies earn less revenue, which may lead to job cuts, wage reductions, and even production slowdowns ó further reducing demand and deepening deflation. This cycle is known as a deflationary spiral.

Some common causes of deflation include:

• Reduced consumer confidence ñ People postpone purchases expecting prices to fall further.
• Excess production capacity ñ When supply outpaces demand, companies cut prices to clear inventory.
• Monetary tightening ñ Higher interest rates or restricted money supply can curb spending and investment.
• Falling asset prices ñ Declines in stock or real estate values can make consumers feel poorer, reducing spending.

Deflation can hurt businesses, investors, and governments. Lower profits discourage new investments, stock markets often decline, and debt burdens become heavier since the real value of debt increases when prices fall. For governments, deflation can make it harder to stimulate economic growth through fiscal or monetary measures.

To combat deflation, central banks often adopt expansionary monetary policies ó such as lowering interest rates, increasing money supply, or implementing quantitative easing ó to encourage borrowing, spending, and investment.

In summary, Deflation represents a decline in price levels driven by weak demand and economic slowdown. While it temporarily boosts the value of money, its long-term effects ó like reduced growth, higher unemployment, and increased debt pressure ó make it a major concern for policymakers and economies worldwide.