Five smart things to know about deflation

1. An economic condition where the average price levels are lower than the price levels witnessed during the previous year as the inflation rate turns negative.

2. The most common cause of deflation is a reduction in spending by companies or individuals leading to low demand for goods and services.

3. Deflation affects the pricing power of companies, erodes profits and forces them to lay off employees, which leads to increased unemployment.

4. Governments and central banks worry about the impact of deflation on employment and wages, and tend to increase spending to encourage demand revival.

5. The problem in many economies is despite keeping the interest rates low and government spending, there is deflation and weak demand.



(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)