deflation

1. Downturn in an economic cycle caused by circumstances, or brought about by government policies. Deflation is opposite of inflation and is characterized by (1) increase in citizens' purchasing power due to the falling prices, (2) decrease in wages, or slowdown in their increase, due to falling levels of employment, (3) decrease in availability of credit due to higher interest rates and/or restricted money supply, and (4) decrease in imports due to lack of demand. Governments cause deflation usually to improve their balance of payments position, and/or to prevent overheating of the economy by an accelerating rate of inflation. Deflation is caused either by increasing taxes and/or interest rates, or by cutting down on government spending. Although effects of deflation are opposite to that of inflation, certain costs (such as minimum pay) generally do not fall. And, whereas inflation may or may not result in higher levels of output and employment, significant deflation always results in lower output and employment. See also disinflation.

2. Conversion of an economic factor (such as wages or retail prices) from a nominal amount to a real amount by canceling the effects of inflation. See also deflator.