Deflation

Deflation is a decrease in general prices of goods and services. It occurs when inflation rate falls below 0%.

It increases the value of the value of exchange and allows one to buy more goods with less money. Deflation can be disastrous for economies as it encourages people to save as goods will be cheaper in the future. The poor demand causes prices to decrease more. As no-one is willing to invest companies’ profits decrease and the whole economy goes crashing. Deflation also inflates the cost of debt and so enriches creditors at the expenses of debtors.

Say your TV was broken and you needed a new one. At the same time the inflation rate is falling below 0%, so there is now deflation. You could go and buy the TV now, or wait until next week where it would cost you less. Obviously, you decide to wait, so the TV company makes no money. It doesn't spend any money either, as it follows the same thought that you had. You can see that deflation is really a threat to economies as it can discourage people from spending.