Deflation

Although governments have the objective of low inflation, it doesn’t necessarily follow that if inflation is bad then the opposite, deflation, is good.  We have already looked at inflation and seen that it is a rise in the average level of prices in an economy over time; but we need to be careful to distinguish between disinflation and deflation.  Deflation is the opposite of inflation in that it is a fall in the average level of prices in an economy over time, and the statistics will show a negative rate of inflation.  Disinflation on the other hand is a slowing of the rate of inflation, such that prices are still rising but the rate at which they are rising is less.  This means the statistics for inflation will still show a positive number (prices are rising), but the number will be smaller, e.g. inflation falling from 5% to 2% is disinflation, but -3% would be deflation.

You need to be able to explain what deflation is, what are the potential causes and what are the problems associated with it.  You should think about how you would answer a question which asked which is worse, inflation or deflation?