You may come across the word deflation in economists’ debates. Many ordinary people do not know exactly what they mean by this word. Deflation is defined as a year-on-year decline in the price level in an economy. The opposite of deflation is inflation, which is a rise in the price level in the economy.
Deflation is welcomed by buyers
Deflation increases the purchasing power of money. In practice, this means that you can buy more goods and services with the same amount of money than in the past. From this point of view, deflation is mainly beneficial for buyers. On the other hand, deflation does not benefit debtors, who see the real value of their debts increase.
Deflation is a problem for the economy
Economists consider deflation to be harmful and a serious problem for the economy. Central banks use monetary policy tools to prevent deflation from leading to a so-called deflationary spiral. A long-term fall in the price level leads to a fall in demand and a consequent reduction in investment, consumption and government spending, while at the same time unemployment rises, production falls and GDP falls.