What is a defining characteristic of deflation?

Deflation is defined as a decrease in the general price level of goods and services over a certain period. When deflation occurs, the inflation rate falls below zero, indicating that the purchasing power of money increases as prices drop. This reduction in prices can be caused by various factors, including decreased demand for goods and services, increased productivity, or a reduction in the money supply.

The concept is significant because deflation can lead to reduced consumer spending as people anticipate further price declines, which can create a cycle of lower production, layoffs, and further economic contraction. Understanding deflation is crucial for analyzing economic conditions and formulating appropriate monetary and fiscal policies.