What is deflation?

📘 In Brief Deflation is a sustained decline in the general price level of goods and services. This means that money gains purchasing power over time – you get more goods for the same amount of euros. It is usually caused by a decline in aggregate demand, for example due to falling consumer spending or investments, while supply remains the same or increases. The result is a dangerous downward spiral: consumers postpone purchases because they hope for even lower prices, which further reduces demand. Companies generate less revenue, have to cut wages or lay off staff, which further weakens household purchasing power. The real debt burden also rises, as loans must be repaid with increasingly valuable euros, which can lead to more insolvencies. Unlike a brief price reduction for individual products, deflation is a macroeconomic phenomenon that central banks find difficult to combat, since interest rates can hardly fall below zero. It is therefore considered a more serious problem than moderate inflation because it persistently cripples growth and employment. 🔍 Why This Matters Deflation is a sustained decline in the general price level of goods and services. It occurs when aggregate demand persistently falls short of supply, for example due to falling consumer spending, a shrinking money supply, or a technological productivity boost. Unlike a one-off price reduction, it is a self-reinforcing process: consumers postpone purchases in anticipation of further falling prices, which further weakens demand. The consequences are insidious because nominal debts gain real …