What is deflation and why is it worse than inflation?

Deflation is a decrease in the general price level of goods and services in an economy over a period of time. It occurs when the supply of goods and services exceeds the demand for them, leading to a reduction in their prices.

Deflation can be worse than inflation because it can lead to a vicious cycle of declining demand and economic activity. When prices are falling, consumers and businesses may delay purchases in the hope of getting a better deal later, leading to further reductions in demand and prices. This can lead to a decrease in production, investment, and employment, causing economic stagnation or even recession.

In addition, deflation increases the real value of debt, which can be a problem for borrowers. If the value of money increases over time, it becomes more difficult for borrowers to repay their loans with money that is worth more than when they borrowed it. This can lead to defaults, bankruptcies, and financial instability. For these reasons, deflation is generally considered more harmful to an economy than moderate inflation.

The effects of inflation are often not directly felt but are played out over a long time, especially long-term investments are vulnerable to inflation.


At Horizon65, we created a mobile app that enabled you to check the effect of inflation on your savings.

Similar Questions

Who benefits from inflation and who gets hurt by inflation?

Inflation can have both winners and losers. Those who benefit from inflation are borrowers, particularly those with fixed-rate loa...

What is the inflation target 2?

Inflation target 2, also known as “2% inflation target,” refers to a monetary policy framework in which a central bank...

Why is low inflation bad?

Low inflation can be bad for several reasons. Firstly, it can lead to a decrease in demand and economic growth, as consumers delay...

Ready to get started?

Download our app and start gaining insight into your current and future finances.