Meaning of Deflation:

Deflation refers to a continuous decrease in the general price level in an economy over a period of time. It’s the opposite of inflation. Deflation is a state of affairs or situation in which there is a fall in the general price level along with fall in production and employment and off course rise in the purchasing power or value of currency. The causes of deflation are many like lack of demand, over savings Etc.

Prof. Samuelson says, By deflation we mean a time when most prices and costs are falling.

Causes of Deflation:

1. Decrease in the total Demand: One of the primary causes of deflation is a decrease in total demand. This can happen due to various factors such as a decrease in consumer spending, investment, or government spending. When demand falls, producers are forced to sell their produce for lower prices and than fall in prices of goods and services, leading to a general decline in prices.
2. Technological Upgradation: Technological progress can increase productivity, leading to a decrease in production costs. While this can be beneficial in the long term, in the short term, it can lead to deflationary pressures as producers lower prices to remain competitive.
3. Increase in Savings: If households and businesses increase their savings and reduce spending, it can lead to lower demand for goods and services, causing deflationary pressures.
4. Decrease in Money Supply: A decrease in the money supply can lead to deflation as there is less money available to purchase goods and services, resulting in lower prices. Deflation arises due to fall in the supply of money may be due to decrease in the volume of currency issued by central bank.
5. Debt Deflation: When there is a high level of debt in an economy and asset prices decline, borrowers may struggle to repay their debts. This can lead to a decrease in spending and investment, cause deflationary pressures.
6. Fiscal measures: Deflation may arises due to fiscal measures also such as increase in taxation, reduction in public expenditure, etc. adopts by the govt.
7. Global Factors: Deflation can also be influenced by global factors such as a decrease in global demand, oversupply of goods and services, or a decrease in the price of imported goods.

Consequences of deflation are.

• Lower down Consumer Spending: When prices are expected to fall, consumers may delay purchases, leading to lower consumer spending.
• Increase in Debt Burden: Deflation can increase the real burden of debt since the value of debts remains constant while prices are falling.
• Uncertainty in Business: Deflation can lead to uncertainty for businesses, reducing investment and hiring.
• Wage Stagnation: Falling prices may lead to stagnant or falling wages, impacting household incomes.
• Price Deflation: Deflation can also lead to a decrease in the value of assets such as real estate and stocks.

Conclusion:

Central banks often try to control deflation by implementing monetary policies, such as lowering interest rates , percentage of CRR etc. to stimulate spending and increase inflation. However control of deflation can be challenging, particularly if it is caused by structural factors such as technological advancements or demographic changes.

also read: explain the causes of inflation.