Deflation is when prices keep going down. This might sound like a good thing at first, but it can have a detrimental effect on jobs and wages. Statement on Bank of England website
Deflation is the decrease in the general price level for goods and services... {when} the inflation rate falls below 0%.
Deflation is a term used by economists to describe what might appear 'a good thing' may in some circumstances have a serious downside.
Prices on a continuous downward trajectory may lead to a decrease in demand. This is because consumers will rationally wait for even lower prices. Why buy a new car for £20,000 when it is like to be £15,000 in a year's time?
Money may initially go further leading to more being theoretically available to spend. This is good news for those who have already have a reserve of savings. If you are buying a property, it has now become more available.
But what happens if you borrow to buy this property - and the price keeps falling. Now you have an investment that is falling in value while you are paying back on the higher price.
More saving, less spending
When there expectation of further falls (a deflationary cycle) the average person prefers to save than to spend (see Japan in the 1990s for example). Wages stagnate or fall. People can afford less so there is pressure for prices to fall further to generate immediate income.
Financial historian, Amity Shales summarises the issues. "Deflation ... hurts good people, strivers who over-borrow. {It} can cause depressions, as the U.S. saw in the early 1930s.
In the Great Depression, there wasn’t enough money around -- literally. Lacking cash, banks collapsed, and good people did lose homes or farms. More banks collapsed.
It is important to remember, however, that there can be upsides, though sometimes excluding specific economic sectors
{But}..... Deflation doesn’t always spell apocalypse. It can coexist with prosperity -- or even perpetuate it. There was deflation in the 1920s. Prices fell in 1923, and 1925 through 1928. The money shortage hit one sector, farming, hard.
Price stability is the key:
Overall, the economy grew. Unemployment stayed low. Vigilance on inflation kept prices stable. Stable prices made life easier. For example Harvard’s tuition stood at the same level, $150, between 1870 and the beginning of World War II.
Those bankers
In times a deflationary cycle, banks lower interest rates to stimulate demand. In the financial crash of 2008 they also resorted to complex scheme known a quantitative easing.
Essentially this consisted of printing more money to allow economies to kick start. This worked - up to a point - but has had negative consequences: most notably the toxic combination of lower growth and increased debt
What is inflation?