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serving the Public interest of Transparency in Debt Capital Markets
The Collaborative Market Data Network
Serving Transparency in Capital Markets
The Collaborative
Market Data Network
Deflation

From the Collaborative Bond and Money Market Data Portal

Deflation is a situation, opposite to inflation, wherein there is a sustained decline in the general price level of goods and services in an economy. Deflation can generally be measured by indices such as the Consumer Price Index (CPI). Contrary to temporary price drops, deflation represents a broad and persistent downward trend in the economy. 

Some causes of deflation include: 

  • Weak aggregate demand: households and firms reducing spending
  • Excess supply or overcapacity: key sectors with an excess in their supply
  • Tight monetary conditions: insufficient credit or credit growth
  • Asset price collapses: such as house prices, which may depress spending and investment

Some consequences of deflation include: 

  • Increased value of 'real' debt: debtors have harder time paying back loans, discourages borrowing and investment
  • Reduces 'real' wages and profits: businesses must lower prices while keeping costs the same
  • Delayed spending: expectation of lower prices leads to households and firms delaying spending
  • Stagnation: decreased spending, borrowing and investment lead to low or zero-growth

Deflation should not be confused with disinflation, which refers to a state where there is still inflation, but at a declining pace.