Deflation

Deflation is the opposite condition of inflation. It is general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in expenditure by government, consumers or business people. Deflation produces many side effects. The major one is that it is a disincentive for the producers. Because of the declined demand and lower investment, unemployment occurs in the economy. Gradually, deflation can worsen into a recession and depression. It is often said that among the two undesirables- inflation and deflation; deflation is more dangerous. Hence, Central banks try to avoid severe deflation.