deflationary spiral

Definition

Economic occurrence where the inflation rate is negative and continuing to decrease. This occurs when prices and wages drop and slows inflation due to lower demand (and therefore, lower production). When this happens, the supply of money usually decreases, leading to a stronger currency which would fuel even lower prices and wages, thereby creating a chain of events. Deflationary spirals are often viewed negatively because they generally occur in recessionary times and tend to worsen the recession.

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deflationary policy deflator