Falling prices across the entire economy is deflation. A
fall in prices in one sector of the economy does not count as deflation. It’s
not necessarily bad; deflation might, for example, be the result of increased
productivity that can lead to greater purchasing power. But when deflation is
the result of decreased demand and excess capacity, it can lead to recession and even depression. Because consumers expect prices to be lower,
they delay making purchases, leading to greater excess capacity and continued
falling prices. Deflation also increases the real value of debt, leading to
bankruptcy and bank failures.