Deflation

• Deflation is the persistent fall in prices in an economy in a year, the complete opposite to inflation, and occurs when the inflation rate is negative.
• Demand-side deflation, also known as bad deflation, occurs when aggregate demand shifts to the left.
• Supply-side deflation, also known as good deflation, occurs when aggregate supply shifts to the right.
• Demand-side deflation can be very bad for the economy as it can lead to lower economic growth and a major issue is that it could be long-term and anticipated.
• Supply-side deflation is more likely to be short term and unanticipated.
• Unanticipated deflation is beneficial in the short term but can be dangerous in the long term as it could lead to a deflationary spiral.
• Rational consumers are likely to delay their spending in anticipation of further price falls, which can lead to a deflationary spiral.
• Businesses are likely to slow their prices or discount in anticipation of further price falls, which can make deflation even worse.
• The deeper consequence of deflation is not just a deflationary spiral, but continually happening deflation can lead to lower growth and higher inflation.
• Unemployment can have horrible consequences for the economy.
• Due to the deflationary spiral, lower growth and higher unemployment can result.
• Interest rates can only really fall to 0% so even if the central bank cuts interest rates to 0% to stimulate the economy and promote more inflation, interest rates will always be positive in real terms.
• From the demand side, deflation can be very dangerous, but if it's short-term and not anticipated, it can be beneficial for consumers and businesses.
• If interest rates are zero percent nominal, the real interest rate is the nominal interest rate minus the inflation rate.
• When there is deflation, real interest rates will always be positive.
• Real interest rates are the nominal interest rate minus the inflation rate.
• If deflation is two percent, the real interest rate is minus two percent.
• From the supply side, deflation can be beneficial if it's anticipated and long term, but if it's unanticipated and short term, it can be problematic for businesses.
• If profits and incomes are falling, it makes it harder to service debt, increasing the real value of debt.