Financial Jargon Buster Dictionary

This glossary is provided for information only and is not regulated by the Financial Services Authority.

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Deflation

A general price decline during which consumer spending is substantially curtailed, bank loans contract and the amount of money in circulation is reduced. It is the opposite of inflation and generally applies to more than just a temporary decline.

Deflation in economics is a persistent decrease in the general price level of goods and services, when inflation is below zero percent, resulting in an increase in the real value of money - a negative inflation rate. When the inflation rate slows down (decreases, but remains positive), this is known as disinflation.

Inflation destroys real value in money. Deflation creates real value in money. Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level.

Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically.