Deflation
Plain definition
Deflation is a sustained decrease in the general level of prices across an economy. As prices fall, each unit of currency gains purchasing power — but prolonged deflation usually signals weak demand and can trap an economy in a downward spiral.
In economics
Central banks fear deflation more than moderate inflation: falling prices encourage consumers to delay purchases, which cuts business revenue, forces layoffs, and deepens the price falls — a self-reinforcing trap. Deflation also raises the real burden of debt. Japan's experience from the 1990s onward is the classic case, which is why modern central banks target positive inflation as a buffer.
Example
If prices fall 2% a year, a $50,000 debt effectively grows heavier each year in real terms, because the borrower repays with money that is worth more. Meanwhile a shopper might postpone buying a car, expecting it cheaper next month — and if millions do the same, carmakers cut production and jobs.
Deflation is often confused with disinflation. Deflation means prices are actually falling (negative inflation); disinflation means inflation is slowing but prices still rise (e.g., from 6% to 3%). Falling prices for one product (cheaper TVs) is also not deflation — deflation is a broad, sustained fall in the overall price level.