What is deflation?
Deflation occurs when the general price levels in an economy are falling – as opposed to inflation when prices rise.
It can be caused by an increase in productivity, a decrease in overall demand, or a decrease in the volume of credit in the economy. During deflation, the purchasing power of currency can rise over time. However, lower prices aren’t necessarily a good thing as the latter two cited reasons tend to signal a recession. For example, if the economy is slowing because interest rates and/or unemployment is rising, demand for goods and services declines, causing businesses to respond with price discounts in order to attract customers.