Deflation, Explained!

OVERVIEW

Decreasing prices? That sounds great! But don’t be fooled… This video assignment introduces viewers to the term “deflation” and explains why decreasing prices might not be as good as it sounds. Viewers learn about the negative consequences of deflation and what causes a deflationary spiral.

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Answer Key

Grade Level

High School

Topics

Inflation

Deflation, explained! What is deflation? Deflation represents the opposite of inflation. Deflation occurs when the overall price level falls for a sustained period of time. While high inflation imposes costs in a society, deflation can be costly, too. Deflation can change people's behaviors in ways that hurt the economy. If people think prices will go down in the future, they may spend less now. When prices fall and people buy less, businesses might need to lower their employees' wages or even layoff workers. These actions could then set in motion a deflationary spiral in which reluctance to spend leads to lower economic activity and a faster decline in prices, with the process then repeating itself. With the recent increase in inflation, people have questions about types of inflation, trends, and more. Check out the Cleveland Fed's Center for Inflation Research to better understand inflation and how it affects you and our economy.