Deflation is a sustained fall in the general price level. It sounds good: things get cheaper. But it can be dangerous. When prices fall, consumers delay purchases, expecting even lower prices later. Demand drops. Businesses cut prices further and lay off workers. Wages fall. The cycle feeds itself.

Deflation is rare in modern economies, but it has happened. Japan struggled with deflation for decades after its asset bubble burst in the early 1990s. The Great Depression saw severe deflation in the 1930s. Central banks now act aggressively to prevent it, usually by cutting interest rates and injecting money into the economy.

Deflation is not the same as falling prices in one sector. A new technology can lower the cost of electronics without causing broad deflation. The concern is a widespread, persistent decline that changes behavior. Once expectations of falling prices set in, they are hard to break.

Why it matters

• Consumers delay spending
• Debts become harder to repay
• Businesses cut investment and jobs
• Central banks lose room to cut rates
• Recovery is slow and painful