What does deflation refer to?

Deflation refers to a sustained decrease in prices across a wide range of goods and services within an economy. This means that over time, consumers are paying less for products compared to previous periods. Deflation can occur due to various factors, such as reduced consumer demand, increased productivity, or enhanced efficiency in production processes. This phenomenon can lead to lower consumer spending and can affect overall economic growth, as people might postpone purchases in anticipation of even lower prices in the future.

Understanding deflation is crucial because it has significant implications for economic policy and consumer behavior. While it may sound advantageous for consumers initially, prolonged deflation can lead to economic downturns and increased unemployment, as companies earn less revenue and may need to cut back on production or workforces.