Deflation

Deflation is defined as a decrease in the average prices during a period in time. Deflation has historically proved to be detrimental to a country's economy because of that growth is negatively affected.

Price cuts because of companies becoming more productive and more competitive is not negative for the economy. Price reductions due to money supply not increasing in a desirable rate is negative because this indicates that the population saves too much and are consuming too little.

Deflation favors those who save money in that their saved capital becomes more valuable. Deflation disadvantage those who have borrowed money, their loans becomes more valuable. Deflation creates unemployment in that saving is more attractive compared to consumption. A high deflation makes it beneficial to consume later rather than now and it can create vicious spirals that provides an even higher deflation.