What is Deflation, Winston Rowe and Associates

Deflation, or negative inflation, happens when prices generally fall in an economy.
By: Winston Rowe and Associates
LOS ANGELES - Aug. 26, 2023 - PRLog -- Deflation is the general decline of the price level of goods and services.

Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological progress.

Deflation incentivizes people to hoard cash because they can buy relatively more with a dollar in the future than now—this has negative feedback loops that can lead to economic depression.

Causes of Deflation

Deflation can be caused by a combination of different factors, including having a shortage of money in circulation, which increases the value of that money and, in turn, reduces prices; having more goods produced than there is demand for.

Falling prices can also happen naturally when the output of the economy grows faster than the supply of circulating money and credit. This occurs especially when technology advances the productivity of an economy and is often concentrated in goods and industries which benefit from technological improvements.

Companies operate more efficiently as technology advances. These operational improvements lead to lower production costs and cost savings transferred to consumers in the form of lower prices. This is distinct from but similar to general price deflation, which is a general decrease in the price level and increase in the purchasing power of money.

This reduction caused the prices of manufactured products that use this technology to also fall significantly.

Consequences of Deflation

Deflation can lead to unemployment because when companies make less money, they react by cutting costs in order to survive. This includes closing stores, plants, and warehouses and laying off workers.

These workers then have to decrease their own spending, which leads to even less demand and more deflation and causes a deflationary spiral that is hard to break. The only time deflation can work without hurting the rest of the economy is when businesses are able to cut the costs of production in order to lower prices, such as with technology.

A deflationary spiral can occur during periods of economic crisis, such as a recession or depression, as economic output slows and demand for investment and consumption dries up.

This may lead to an overall decline in asset prices as producers are forced to liquidate inventories that people no longer want to buy. Consumers and businesses alike begin holding on to liquid money reserves to cushion against further financial loss.

This article was produced by Winston Rowe and Associates you can contact them on line at https://www.winstonrowe.com

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