Deflation

Deflation is the opposite of inflation — a broad-based decline in prices across the economy. While falling prices might seem beneficial for consumers, sustained deflation is considered dangerous because it creates a deflationary spiral: consumers delay purchases expecting lower prices, reducing demand; businesses cut prices further, squeezing profits; companies lay off workers and reduce investment; unemployment rises, further reducing demand. This self-reinforcing cycle can be extremely difficult to break. Deflation also increases the real burden of debt (borrowers repay with money that's worth more), potentially triggering defaults and financial instability. Japan experienced a prolonged deflationary period from the 1990s through the 2010s (the "Lost Decades"), during which the economy stagnated despite near-zero interest rates. The Great Depression saw U.S. prices fall roughly 25% between 1929 and 1933. Central banks fight deflation with aggressive rate cuts and quantitative easing, but deflation is harder to combat than inflation because rates cannot go significantly below zero. Brief episodes of falling prices (e.g., oil price crashes) are different from economy-wide deflation.