Deflation is the opposite of inflation. Whereas inflation is an increase in the price level of goods and services, deflation is a decrease of the price level of goods and services over a period of time.

Causes of Deflation

The causes of deflation are similar to the causes of inflation. A decrease in the money supply can lead to deflation. A more common cause is simply an aggregate decrease in the amount of spending by the government, private companies, and individuals. When people spend less, then demand for goods and services also drops which can lead to prices falling.