Deflation

In economics, deflation is an increase in the real value of the monetary unit of account, as reflected in a decrease in the general price level of goods and services exchanged, measurable by broad price indices. Deflation is a monetary phenomenon, explainable in terms of changes in money supply and velocity relative to spending on output. "It is monetary in the sense that the sustained growth in some monetary aggregate relative to the trend growth of real output (adjusted for the trend in velocity) determines the rate of change in the price level." Deflation is distinct from disinflation, a slowdown in the inflation rate; i.e., when inflation declines to a lower rate but is still positive. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases it. This allows more goods and services to be bought than before with the same amount of currency, but means that more goods or services must be sold for money in order to finance payments that remain fixed in nominal terms, as many debt obligations may. Economists generally believe that a larger deflationary shock is a problem in a modern economy because it increases the real value of debt, especially if the deflation is unexpected. Parts of the financial sector that finance lending by borrowing currency or short-term funds can be stressed as the short-term cost of funds rise above the return available from simply holding money during a deflation. Deflation may also aggravate recessions and lead to a deflationary spiral.