Deflation is a decrease in the general price level of goods and services. It's the opposite of inflation which occurs when the cost of goods and services is rising. Deflation can be caused by several economic factors including a decrease in the demand for products, an increase in the supply of products, excess production capacity, an increase in the demand for money, or a decrease in the supply of money or availability of credit.
Key Takeaways
- Deflation is a decrease in the general price level of goods and services. It's the opposite of inflation.
- Deflation can be caused by several economic factors including a decrease in the demand for products, an increase in the supply of products, excess production capacity, an increase in the demand for money, or a decrease in the supply of money or availability of credit.
- The most dramatic deflationary period in U.S. history took place between 1930 and 1933 during the Great Depression.
- The most recent example of deflation occurred in the 21st century between 2007 and 2009 during the period in U.S. history referred to by economists as the Great Recession.
Deflation can be a cause for concern among economists because a fall in the prices of goods and services can sometimes lead to a fall in home prices, stock prices, and even people's salaries.
There have been several deflationary periods in U.S. history including from 1815 and 1860 and again between 1865 to 1900. One of the most dramatic deflationary periods in U.S. history took place between 1930 and 1933 during the Great Depression. Deflation rarely occurred in thesecond half of the 20th century. The dramatic and consistent price increases from 1950 to 2000 have been unparalleled since the founding of the country.
The most recent example of deflation occurred in the 21st century from 2007 and 2009 during the period of U.S. history known as the Great Recession.
Deflation in the 19th Century
The U.S. didn't have a single national currency until after the Civil War but economists can still track consumer prices in terms of the exchange value of gold.
Prices rose and the U.S. government printed money and borrowed heavily during the War of 1812, a conflict fought between the United States and the United Kingdom from June 1812 to February 1815. Buoyed by the rise of industrial mechanization after the war, the prices of goods dropped beginning in 1815 and continued to drop until 1860.
Output grew consistently during this time even though prices were dropping and it continued to grow until approximately 1860 at the start of the Civil War.
Prices dropped bynearly 3% every year from 1873 through 1879 but real national product growth was around 7% during the same period. Historians have called this period "The Long Depression" because of the presence of deflation despite this economic growth and the rise of real wages.
The Great Depression
Deflationary periods were the result of an increase in production rather than a decrease in demand in the 19th century. Deflation was the result of a collapsing financial sector and bank failures during the Great Depression.
The deflation that took place at the outset of the Great Depression was the most dramatic that the U.S. has ever experienced. Prices dropped an average of nearly 7% every year between 1930 and 1933. There was also adramatic drop in output during the Great Depression in addition to a drop in prices.
Deflation in the 21st Century
The most recent deflationary period in U.S. history was during the Great Recession which officially lasted from December 2007 to June 2009. There was a drop in commodity prices during this time, particularly oil, and economists worried that deflation would lead to a prolonged recession and rising unemployment, creating further strain on the U.S. economy.
The deflation that occurred was less severe than some economists predicted, however. The exact reason for this is unclear but some have speculated that the unusually high cost of borrowing in late 2008 and 2009 put pressure on businesses and prevented them from cutting their prices.
Does Anyone Benefit From Deflation?
Consumers may benefit from deflation in the short run. The buying power of the dollar rises as prices for goods and services fall. A deflationary spiral can be harmful over the long haul, however. Profits can decrease for employers when prices fall, resulting in layoffs and unemployment.
Who Is Hurt by Deflation?
Deflation can be particularly challenging for borrowers. Those who have previously taken out loans can be obligated to pay down debts in money that's now worth more than the amount originally borrowed.
How Do We Get Out of Deflation?
Governments and central banks can adopt several policies when they're targeting deflation. Monetary tools include lowering bank reserve limits which frees up liquidity to support bank lending and lowering interest rates which encourages more borrowing. Both tools can help bolster new investments, spending, and consumption.
The Bottom Line
Deflation is a phenomenon in which the general price level of goods and services decreases over time. It's the opposite of inflation when costs rise. Deflation can be caused by a decrease in demand for certain goods, an increase in supply, and a decrease in the availability of funds or credit. There have been a few periods of deflation in U.S. history, most notably the Great Depression and the Great Recession.
Correction - July 18, 2024: This article has been corrected to state that the Great Recession occurred from 2007 through 2009.
FAQs
There have been several deflationary periods in U.S. history including from 1815 and 1860 and again between 1865 to 1900. One of the most dramatic deflationary periods in U.S. history took place between 1930 and 1933 during the Great Depression. Deflation rarely occurred in the second half of the 20th century.
Were there any periods of major deflation in US history? ›
Major deflations in the United States. There have been four significant periods of deflation in the United States. The first and most severe was during the depression in 1818–1821 when prices of agricultural commodities declined by almost 50%.
What was the largest deflation ever? ›
The Great Depression was the most severe economic depression ever experienced by the Western world. It was during this troubled time that the world's most famous case of deflation also happened. The resulting aftermath was so bad that economic policy since has been chiefly designed to prevent deflation at all costs.
What was the worst inflation periods in US history? ›
America's worst inflation on record occurred during and after World War I, when the price of just about everything—food, clothing, household goods—more than doubled. The largest single-year price increase during the post-World War I era was 23.7 percent from June 1919 to June 1920.
During which decade did the United States experience a period of deflation? ›
Deflation in the late 1920s and early 1930s was qualitatively and quantitatively different than that during the nineteenth century. In the United States, the consumer price index (and the GDP deflator) declined by 24 percent from August 1929 to March 1933, after having been virtually flat from 1921 to 1929.
Has there been deflation in the US? ›
The Bottom Line
There have been a few periods of deflation in U.S. history, most notably the Great Depression and the Great Recession. Correction - July 18, 2024: This article has been corrected to state that the Great Recession occurred from 2007 through 2009. Federal Reserve History. "The Great Recession."
Was there deflation in 1920? ›
The deflation of 1920–21 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product. Unemployment rose sharply during the recession.
Is deflation ever good for the economy? ›
Deflation can be helpful if it's brought on by positive factors, such as technological advances that help businesses increase production.
Who does deflation hurt the most? ›
Debtors are particularly hurt by deflation, because even as prices for goods and services fall, the value of debt does not. This can impact inviduals, as well as larger economies, including countries with high national debt.
Will there be deflation in 2024? ›
'A huge shift in demand'
Prices for “core” goods — commodities excluding those related to food and energy — have deflated by about 2% since August 2023, on average, according to CPI data. They fell 0.2% during the month, from July to August 2024.
Inflation Rate in the United States averaged 3.30 percent from 1914 until 2024, reaching an all time high of 23.70 percent in June of 1920 and a record low of -15.80 percent in June of 1921.
When was inflation at an all time high in the US? ›
The highest inflation in U.S. history was in 1917 when annual inflation reached a rate of 17.84%. The inflation rate of the following three years, from 1918 to 1920, rounded out the top four years with the highest rates in U.S. inflation rate history.
Has inflation ever been negative in the US? ›
The only exception is in 2009, when the inflation rate was slightly negative. In this brief instance, the price level decreased, so the US economy experienced slight deflation. SOURCE: U.S. Bureau of Labor Statistics via FRED, Federal Reserve Bank of St.
What was the biggest deflation in history? ›
The Great Depression was the most severe economic depression ever experienced by the Western world. It was during this troubled time that the world's most famous case of deflation also happened. The resulting aftermath was so bad that economic policy since has been chiefly designed to prevent deflation at all costs.
What was the world's largest deflation? ›
The Great Deflation or the Great Sag refers to the period from 1870 until 1890 in which the world prices of goods, materials and labor decreased, although at a low rate of less than 2% annually.
Who made money in the Great Depression? ›
Business titans such as William Boeing and Walter Chrysler actually grew their fortunes during the Great Depression.
What was the worst period of economic decline in the history of the United States? ›
The U.S. economy shrank by a third from the beginning of the Great Depression to the bottom four years later. Real GDP fell 29% from 1929 to 1933. The unemployment rate reached a peak of 25% in 1933. Consumer prices fell 25%; wholesale prices plummeted 32%.
What was the worst economic period in US history? ›
1920s
- Depression of 1920–1921.
- Wall Street Crash of 1929 and Great Depression (1929–1939), one of the worst economic crises in history.
1929–1941. The longest and deepest downturn in the history of the United States and the modern industrial economy lasted more than a decade, beginning in 1929 and ending during World War II in 1941.
Was the 1970s inflation or deflation? ›
Stagflation in the 1970s was a period with both high inflation and uneven economic growth. High budget deficits, lower interest rates, the oil embargo, and the collapse of managed currency rates contributed to stagflation.
