Deflation

Context:

The wholesale price index inflation has contracted 3.21 percent in May, slipping into negative territory for the first time in over four years and showing signs of deflation.

Concept:

What is Deflation?

Deflation occurs when asset and consumer prices fall over time. t is the opposite of the often-encountered inflation.

A reduction in money supply or credit availability is the reason for deflation in most cases. Reduced investment spending by government or individuals may also lead to this situation.

Impact:

Deflation leads to a problem of increased unemployment due to slack in demand.

What can RBI do?

They may infuse a higher money supply into the economy to counter- balance the deflationary impact.

Is deflation similar to disinflation?
Deflation is different from disinflation as the latter implies decrease in the level of inflation whereas on the other hand deflation implies negative inflation.