Deflation is the process by which the price index decreases and the purchasing power of the national currency increases. Compared to inflation, deflation is less favorable and is accompanied by economic recession and depression.
Deflation arises from an increase in the value of money, which is associated with an increase in the cost of producing a monetary good. The reason may also be a decrease in the value of goods, which occurs with an increase in labor productivity without changing the value of money. Deflation can be caused by a shortage of money in circulation. The latter factor, after the abolition of the gold standard, became the main instrument for the artificial formation of deflation. In this case, the Central Bank and the government of the country withdraw the money supply from circulation, trying to reduce the inflation rate by increasing taxes, raising the discount rate, freezing and preventing the growth of wages, reducing state budget expenditures, and so on. In modern conditions, deflation takes place with an increase in unemployment, a decrease in output and a recession in the economy. This leads to the fact that economic agents reduce the volume of investments to place these funds after a while at more favorable rates. This process becomes the reason for an additional drop in demand, which increases the rate of decline in production volumes and the fall in prices for goods. Other negative consequences of deflation include: a decrease in wages, a decrease in bank lending, a decrease in corporate profitability and business value, staff cuts, etc. Some conditions of deflation can lead to positive moments and periods of relative prosperity. Thus, an increase in the volume of supply of products can occur due to the improvement of production technology. At the beginning of deflation, it is recommended to refrain from lending, not to make significant purchases and save up spare funds. In some cases, it makes sense to get rid of unnecessary assets before they lose value.