Features of Deflation

In all the major economies of the world majority of times prices of goods rises but many times situation reverses and instead of rise in price one gets to see fall in prices of goods and this uncommon phenomenon is called deflation. In order to understand it better let’s look at some of the important features of deflation –

  1. The first and foremost feature of deflation is that under deflation price fall should be continuous and for extended period of time and not for short period and then only price fall can be termed as deflation otherwise if price falls for one or two months and then again it rises in next month then it is not the case of deflation.
  2. Another characteristic of deflation is that there is limit beyond which price of goods cannot fall as price of goods cannot be less than zero and also consumers have to spend some money on the goods in order to live so consumers cannot stop eating food or going to hospital if they are sick and so on which is the case in inflation where there is no limit to which the price of goods can rise so in case of hyperinflation prices of goods rises even by 1000 percent.
  3. Another important feature in case of deflation is that it is normally controlled by government by measures such as increasing the money supply in the economy by increasing the government expenditures and by central banks through reducing the rate of interest in the economy so that money becomes cheap and it circulates more in the economy because one of the reasons for deflation is people not willing to spend the money in economy.
  4. Deflation can be vicious cycle because due to lower demand prices fall and due to fall in prices companies do not earn enough profit to continue production which in turn results in them stopping the production activities which results in lower employment opportunities in the market which further reduces the purchasing power of consumers leading to further fall in demand from them.
  5. Another feature of deflation is that in case of deflation cash is considered to be the king because in order to control deflation government and central banks reduces interest rates which in turn results in rates on fixed deposits getting reduced making bank deposits unattractive and since companies are not earning profits stock market also becomes unattractive which leaves the investors no option but to keep cash with them.
  6. In times of deflation as far as business man are concerned it hits them the hardest as their profit and wealth falls considerably in time of deflation however as far as new business are concerned it is best time to start a business by taking a loan since rate of interest are low and businessman can take loan on lower rate of interest and start to build the business and reap the benefits in future when the situation improves.

As one can see from the above that deflation has many unique characteristics and country facing deflation should quickly try to solve it because in the start it may look great that prices of goods are falling but in the long term deflation causes more damage to the economy.

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