The simplest definition of deflation is that it is the antonym, i.e. the opposite, of inflation.
Deflation is a decline in prices caused by a contraction in the money supply. This occurs because the decrease in the money supply increases the value of the currency. Another possible cause of the decline in prices is an increase in the supply of goods and services that makes the supply of goods and services greater than the demand for them.
When deflation occurs, the population sees its purchasing power increase, i.e., with the same amount of money it can consume more.
Deflation, although it may seem otherwise, is not a desirable situation for the economy. While it is true that it increases the purchasing power of consumers and that, if accompanied by new investments by businessmen to produce more, it can increase employment, it is also true that it can have some pernicious effects on the economy.
When there is a situation of falling prices, citizens sometimes choose to defer their consumption and increase their savings, waiting for prices to fall again. In this situation, further price declines will occur, which, if accompanied by stagnation or a decrease in consumption, will lead to a decrease in production and thus an increase in unemployment.
An increase in savings in turn leads to a decrease in interest rates. This situation can be repeated over and over again until a deflationary spiral is formed from which it is difficult to escape and which can lead the country to suffer a long-lasting economic crisis.
The ideal price situation in an economy is low inflation.