Deflation
Deflation is when the prices of goods and services decrease across the entire economy, increasing the purchasing power of consumers. It occurs when the inflation rate falls below 0% (a negative inflation rate).
Inflation reduces the value of currency over time, but sudden deflation increases it. This allows more goods and services to be bought than before with the same amount of currency.
And while cheaper goods may appear beneficial for purchasing power, deflation poses a threat to the broader economy.
It can be considered bad for a nation as it can signal a downturn in an economy, leading to a recession or depression.
As prices fall, consumers tend to postpone purchases in the hopes of further price cuts.
A lack of demand then forces companies to reduce production, freeze hiring or lay off workers, and agree to new discounts to sell off their stocks— weighing on profitability even as costs remain the same.
Deflation vs. Disinflation
Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e., when inflation declines to a lower rate but is still positive.
Disinflation could be a change from 4% annual inflation to 2% annual inflation, meaning a good that used to cost Rs 10 now sells for Rs 10.20, instead of a projected Rs 10.40.
Deflation, on the other hand, describes actual decreases in prices. With 2% deflation, a good that used to cost INR 10 would now cost Rs 9.80.
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