Deflation , causes, effects and

measure to control deflation

*Deflation is general decline of the price level of goods
and services

• growing supply of goods and services

• contraction in the supply of money and credit

• increased productivity and technological improvements

•.Deflation is widely regarded as an economic “problem”

that can intensify a recession or lead to a deflationary
spiral.
Countries with the lowest
inflation rate in 2015
Deflation: Causes

• increase in the supply of goods and services

•lack of increase in the supply of money and credit.

•Consumer’s purchasing power increases over time

•increase in the supply of goods and
services from technological progress

•discovery of new resources, or an

increase in productivity

•Under specific conditions, deflation

can also occur in and after periods of
economic crisis
Deflation usually occurs during a deep
recession, when there is a sustained fall in
demand and output.

This deflation may occur in the aftermath of

credit boom and bust or severe tightening of
monetary policy/fiscal policy.

Monetarists emphasize the role of the money

supply – falling money supply and/or falling
velocity of circulation causing a fall in the
price level.
Deflation spiral

Deflation can become a self-reinforcing loop. Falling prices create

circumstances for prices to continue falling.
 Effects of Deflation
 Frequently, deflation occurs during recessions. Considered an adverse
economic event, can cause many negative effects on the economy,
including:
• Reduced business revenues : Discourages consumer
spending. falling prices often encourage people to delay
purchases because they will be cheaper in the future

• periods of deflation lead to lower consumer spending and

lower economic growth.

• Increase real value of debt- debtors find it difficult to

pay off their debts.

• consumers and firms have to spend a bigger percentage of

disposable income on meeting debt repayments.
* Increased real interest rates. Interest rates can’t fall below zero.
If there is deflation of 2%, this means we have a real interest rate of
+ 2%.

* deflation can contribute to an unwanted tightening of monetary

policy
•Real wage unemployment. workers resist nominal wage cuts .
Therefore, in periods of deflation, real wages rise.
•More difficult for relative prices and wages to adjust. If the average
prices or wages are increasing by 3%, it is easier for some goods to rise
by 0% and some to rise by 6%.

•Deflation can become entrenched and difficult to end. The

experience of Japan in the late 90s and 00s was that when deflation
became the new norm, it was very hard to change inflation expectations
and regain normal growth
 Remedies for Deflation

*
•Until the 1930s, it was commonly believed by economists that deflation
would cure itself. •

* As prices decreased, demand would naturally increase and the economic

system would correct itself without outside intervention.

* This view was challenged in the 1930s during the Great Depression by the
economist Keynes who argued that the economic system was not self-
correcting with respect to deflation.
** If the central bank reduces the interest rate then the commercial
banks will also advance loans at a lower interest rate which will boost
up the investment, resulting increase in demand for capital goods and
employment. Thus incomes will increase price level will start rising.

• ** In order to increase the aggregate demand the government has to

increase its expenditures. By increasing expenditures incomes of the
people will rise and price level will tend to move upward

** By Printing extra money through the central bank and injecting in

the economy the government can increase the aggregate demand
which will further enhance the price level.
* By encouraging the private sector for investment through various
immunities like subsides or tax reduction the aggregate demand can
be used

*People should start using their savings on consumer goods or

investment.

* To increase exports and reduce the imports, the income level of the
people and prices level can be raised
 To Sum Up

 What: Deflation is a sustained decrease in the general price

level of goods and services.

 How: Deflation occurs when the annual inflation rate falls

below zero percent and prices continue to fall on a sustained
basis

 Why: Deflation is caused by a shift in the supply and demand

curve for goods and interest, particularly a fall in the aggregate
level of demand.
Tha
nk y
ou