Deflation

Deflation is the opposite of inflation: a sustained general fall in prices. It does not mean a couple of items getting cheaper but the overall price level of an economy declining.

Cheaper goods sound good, yet deflation is considered the more dangerous condition. If things will be cheaper next month, people postpone purchases; weaker spending cuts company revenue, which cuts production and wages; lower incomes cut spending further. This loop is called a deflationary spiral.

It is especially harsh on borrowers. Prices fall but the principal and interest owed do not, so the real burden of debt grows on its own. That is precisely the reverse of how inflation lightens debt, which is why deflation arriving on top of heavy household and corporate borrowing hits so hard.

It is also difficult to fight. Rising prices can be pressed down by raising rates, but rates cannot be cut far below zero, so emergency tools such as quantitative easing get deployed. Japan's long stretch of low prices and weak growth from the 1990s is the case most often cited. Central banks target inflation near 2% rather than 0% precisely to keep a buffer against falling into deflation.