Deflation is an economic phenomenon characterized by a sustained and widespread decrease in the general price level of goods and services within an economy. In a deflationary environment, the purchasing power of money increases over time, meaning that a unit of currency can buy more goods and services than it could before.

Deflation can have several consequences for an economy. While falling prices may seem beneficial for consumers initially, it can lead to a series of negative effects. Businesses experience lower revenue and profits as their products become less valuable, which can lead to reduced production, layoffs, and economic contraction. Consumers may delay purchases in anticipation of further price drops, slowing down demand.

Central banks typically combat deflation by implementing monetary policies, such as reducing interest rates or engaging in quantitative easing to increase the money supply and encourage borrowing and spending. Deflation can be particularly challenging for economies with high levels of debt, as the real value of debt increases over time in a deflationary environment.

Overall, deflation is a complex economic condition that can have far-reaching impacts on consumption, investment, and employment, and it requires careful management by policymakers to prevent its negative consequences.