Deflation is the opposite of inflation and describes the process of sustained decreases in the general price level in an economy. Thus, the purchasing power of money increases persistently. Since deflation describes the opposite of inflation, it can also be called negative inflation.
Simplified, this means that the same basket of goods, consisting of exactly the same products, becomes slightly cheaper every period of time. So next week you can buy more with the same money than today.
What in itself may sound attractive to all savers is economically one of the worst scenarios. Deflation arises from a very severe recession,which is always self-reinforcing. Companies make fewer profits and in addition they have to pay higher costs – because the costs are often fixed in the contract and this fixed figure has a little more value every day due to deflation. Thus, deflation runs in a devil’s circle.In addition, the central bank and the state cannot do much about it after a certain point – at some point, for example, interest rates simply cannot be lowered any more!
This is why every country aims for mild inflation, because they would rather accept it than run the risk of suddenly falling into deflation. The most famous modern example of deflation is Japan, which had to fight it in the 1990s and suffered severe economic damage. Historically, the Great Depression is one of the most famous deflations.
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