Deflation

Deflation is a fall in the general level of prices across the economy, the opposite of inflation. It should be distinguished from disinflation, in which prices still rise but more slowly, and from declines in particular prices, such as for electronics.

While falling prices may seem beneficial to consumers, widespread deflation can harm the economy. People may postpone purchases in expectation of lower prices, reducing demand; debts rise in real terms, burdening borrowers; and wages are hard to cut, which can raise unemployment. The Great Depression saw severe deflation in the early 1930s, and Japan experienced mild deflation for much of the 1990s and 2000s. Economists such as Irving Fisher described the "debt-deflation" spiral.

Central banks usually aim for low positive inflation, about 2 percent, partly to provide a buffer against deflation, since interest rates cannot fall far below zero. Some Austrian-school economists and advocates of the gold standard argue that deflation driven by productivity growth, as in much of the late nineteenth century, is benign and that central banks' fear of it is overstated. Fighting it can require unconventional monetary policy.