What is Deflation?

What is deflation? Deflation is the decline in the price for goods and services. It can also be referred to as the increase in the value of real money. In other words, it’s the value that the current currency will go up per unit of goods or services.

Deflation Explained

Deflation often occurs when the demand for goods or services drops. As this happens, the price of the current supply will often drop in order to meet demand. Deflation economics often happen during large recessions or depression times. Furthermore, deflation should also not be confused with the term disinflation which refers to a slowing effect of inflation or a slow increase in the price of goods and services.

Deflation Examples

Some common examples of when deflation has occurred are times like the Panic of 1837, the Civil War, as well as the Great Depression.
The Panic of 1837 was the first major time that deflation occurred as people rushed to banks there was an overall drop in the money supply as well a major decrease in the price of goods and services.
During the Civil War, there was another era of deflation as the United States set the dollar on a gold standard and reduced the amount of money printed during the war. This caused an overall drop in the money supply and therefore an overall drop in the prices.
Finally, the Great Depression was a time in which many banks failed and the ability to gain money became difficult thus causing deflation to occur and the price of goods to fall dramatically. This period of deflation is probably the most dramatic because of the time in which it took to climb back to normal levels of inflation.

See Also:
What is Inflation?
Treasury Inflation Protected Securities (TIPS)
Consumer Price Index (CPI)
Supply and Demand Elasticity
Economic Indicators