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Deflation

Discussion in 'Traders Glossary' started by Pharaoh, Jun 5, 2009.

  1. Pharaoh

    Pharaoh Colonel

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    Deflation is a drop in the average prices for goods and services generally tied to an increase in the value of the currency. More simply, your money buys you more now than it did previously.

    This can be triggered by a drop in the availability of currency or credit and is tied to decreases in spending by individuals, companies, and the government. Since deflation means that currency will be worth more later, companies tend to further reduce spending, leading to less demand for materials and workers. This increased unemployment. Increased unemployment reduces consumer spending more. Decreased production and decreased employment reduce the amount of taxes collected by the government, thus decreasing government spending even more.

    The most famous instance of deflation in modern times as during the Great Depression of the 1930's.

    See Inflation
     

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