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What is Deflation?

Deflation is an economic term used to describe a trend of broad-based price declines for goods and services. Deflation is generally considered a big negative in the realm of economics.

If a country is experiencing deflation, it is usually because demand for goods has fallen substantially, pushing prices down. It can also be tied to falling investment and government spending, both factors that signal weak demand in an economy.

Deflation is greatly feared by central bankers around the world because of its harmful implications - rapid deflation can cause a feedback loop of lower profits, bankrupt businesses, layoffs and high unemployment.

Lower income would lead to lower demand for goods and services, meaning prices would drop — lowering profits still further — and the cycle could theoretically continue on into a depression.

Keywords: profits, recession, deflation, unemployment, depression, central banks, Great Depression,