What is deflation?

Deflation is defined as a decrease in the general price level of goods and services within an economy. This means that the overall prices for a basket of goods and services are falling, leading to increased purchasing power of money. When deflation occurs, consumers can buy more with the same amount of money, which can seem initially beneficial; however, it can lead to reduced consumer spending as people anticipate that prices will continue to decrease. This can create a vicious cycle of reduced demand and economic contraction.

The term specifically refers to a broader economic phenomenon rather than to transient price reductions, such as those that might be seen during sales events. It also should not be confused with inflation, which signifies an increase in the price level across the economy. Additionally, while changes in money supply can influence prices, deflation itself specifically pertains to the overarching trend in general price levels, making the statement about an increase in the money supply irrelevant to the concept of deflation.