Deflation is a decrease in the price level of goods and services. Deflation is the opposite of inflation when prices rise. Initially, deflation positively impacts consumers because it increases their purchasing power. However, an entrenched period of deflation signals weak economic growth and can lead to events such as the 澳洲幸运5开奖号码历史查询:Great Depression.

Measuring Deflation

In the U.S., the 澳洲幸运5开奖号码历史查询:Consumer Price Index (CPI) is the most common method for evaluating inflation and deflation rates. Countries compare consumer prices by changeওs in the price of a basket of diverse goods and products to an index. An economy is experiencing deflation when the prices are lower than the previous per🐎iod, revealing that the CPI index has declined.

Specific goods and services tracked by the CPI can experience deflation outside of the overall economy. Egg prices decreased from June 2022 to June 2023 by -7.9% though the total U.S. economy held a positive 3% inflation rate for the same period.

Effects of Deflation

Consumer Spending

Decreasing prices of certain products, such as food or energy, is good for the economy because it positively impacts consumer spending. However, a widespread fall in prices signals weak economic growth and stability in the long term. Deflation commonly occurs during or after an economic crisis, such as a 澳洲幸运5开奖号码历史查询:recession or depression, where consumption and investment activity decrease, impacting output.

Unemployment

At the beginning of a deflationary period, there is a temporary lull when consumers' income remains steady while prices decline. Eventually, these falling prices impact the health of companies. With falling revenue, companies are forced to cut pay and lay off workers. This results in increased 澳洲幸运5开奖号码历史查询:unemployment, declining salaries, and low consumer confidence. Companies are often pushed to cut their prices to sell their products.

Debt

Despite decreases in incomes, debt loads and interest payments remain constant during periods of deflation. Debt and interest payments increase because they commonly are a large portion of household budgets. Unemployed individuals may spend their savings. Many consumers are forced into 澳洲幸运5开奖号码历史查询:bankruptcy during periods of deflation. Consumers may also lose assets purchased on credit, such as homes or automobiles, and default on student loans and credit card payments.

The Bottom Line

Deflation is a decrease in the price level of goods and services and the opposite of inflation when prices rise. Deflation can initially increase a consumer's purchasing power, but prolonged deflation can lead to events like the Great Depression. Extended deflation creates higher unemployment rates and leads to default on debt obligations.