Deflation is a decrease in the general price level of goods and services. It is the opposite of inflation, which is an increase in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%.
Deflation is bad for the economy because it reduces the purchasing power of money. When prices fall, people have less money to spend, which can lead to a decrease in economic activity. This can lead to a decrease in production, employment, and wages. Deflation can also lead to an increase in debt, as people are unable to pay off their loans due to the decrease in their purchasing power.
Deflation can also lead to a decrease in investment, as investors are less likely to invest in an economy with falling prices. This can lead to a decrease in economic growth and an increase in unemployment.
Deflation can also lead to an increase in the cost of borrowing, as lenders are less likely to lend money in an environment of falling prices. This can lead to a decrease in consumer spending, which can further reduce economic activity.
In summary, deflation is bad for the economy because it reduces the purchasing power of money, leads to a decrease in economic activity, and increases the cost of borrowing. It can also lead to an increase in unemployment and a decrease in economic growth. Therefore, it is important for governments to take steps to prevent deflation and maintain a healthy level of inflation.
