Deflation is a period when the general price level falls i.e. the cost of a basket of goods and services is actually becoming less expensive. It is normally associated with falling level of AD leading to a negative output gap where actual GDP < potential GDP. But deflation can also be caused by an increase in a nation’s productive potential which leads to an excess of aggregate supply over demand.

My AS economists have been writing about deflation this week. Here is a selection of recent articles on price deflation that considered some of the issues involved:

Independent: Why buy now if prices are plummeting? How deflation could drag us all down

Reuters: What is deflation and why is it feared?

Belfast Telegraph: Deflation is the enemy of growth and prosperity