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Deflation

📈 Economics By CampusDown Wiki Editorial Team Last updated
Deflation is a sustained fall in the general price level, which can deepen recessions by depressing demand and raising real debt burdens.
Contents
  1. 1. Overview
  2. 2. Frequently asked questions
  3. 3. References

Overview

Deflation is a persistent decline in the general price level, unlike disinflation (slower inflation). It can stem from weak demand, deleveraging and ageing, or from productivity gains. It is dangerous because people delay purchases, real debt burdens rise (Fisher’s debt-deflation theory, 1933) and nominal rates hit the zero bound, risking a liquidity trap. Japan experienced prolonged deflation after its early-1990s bubble burst. Responses include rate cuts, QE, inflation targets and fiscal expansion (Bernanke, 2002). Compare stagflation.

Frequently asked questions

Aren’t falling prices good?
Sustained deflation tends to hurt spending, investment and jobs.

References

  1. Fisher, I. (1933). The debt-deflation theory of great depressions. Econometrica, 1(4), 337–357.
  2. Bernanke, B. S. (2002, November 21). Deflation: Making sure “it” doesn’t happen here. Remarks before the National Economists Club.
  3. Koo, R. C. (2009). The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession. Wiley.

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This article was last updated on October 24, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.