What is Deflation?

Deflation is the decline in the overall level of prices in an economy. It typically happens due to a drop in aggregate demand or significant increase in supply of goods and services.

A stable and moderate rate of inflation is the most important mandate of Central Banks around the world. Technological improvements resulting in increased productivity and general falling population rates are two of the biggest deflationary forces that the world face currently. While the last 20 years since the turn of the century have not been outright deflationary, yet it has been quite difficult to sustain a reasonable level of inflation in developed economies, primarily on account of these massive structural deflationary forces!


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#1. Which industry enjoyed great success during the highly deflationary period of The Great Depression of 1929?

Hollywood transitioned from silent films to “talkies” during the Great Depression. Since tickets were so affordable many people could escape from the harsh realities of the Great Depression by watching movies.

#2. What is disinflation? Disinflation is when …

Disinflation is when the rate of inflation starts to slow but hasn’t become negative yet. As soon as it becomes negative, then we have deflation.

#3. Which of the following is NOT a cause of deflation?

Companies hiring more workers could actually be a sign of inflation, when demand is growing faster than the available supply.

#4. How can deflation be measured?

Deflation (and Inflation) is commonly measured through the Consumer Price Index (CPI), which tracks the prices of a group of commonly purchased goods and services.

#5. Why do people tend to hoard cash during a deflationary period? Because …

During deflationary periods the supply of goods is often higher than demand, so sellers have to reduce their prices to get their stock to sell. People tend to delay consumption in the hope of prices falling further.

#6. What is a tool that can be used to counter deflation?

Lowering the interest makes it easier to borrow money and encourages new investments. It also makes it more attractive for individuals to buy property.

#7. Who is most disadvantaged by deflation?

Deflation is particularly harmful for borrowers, because they have to pay back their debts with money worth more than it was when they first borrowed it.

#8. What are some of the best ways for individuals to prepare for deflation?

The more secure your own financial position is during times of deflation, the more likely it is that you will be able to make it through.

#9. Inflation is worse than Deflation. True or False?

Well, the answer to this question can also be “It depends”. On various factors like the stage of a country’s development, its demographics, etc. But generally speaking, deflation tends to be worse than inflation and recent history has proven so as well. Theoretically interest rates have a lower bound of zero (although Europe and Japan have shown us that practically interest rates can be lowered below zero). Yet it is very difficult to keep lowering rates below zero where as generally inflation can be tamed by raising interest rates more easily.

#10. While the Great Depression of the 1920s was a terrible event, do you know what good came out of it?

The Great Recession caused aspiring inventors to pursue their creations – partly because they were unemployed and tired of searching for work.