Einar H. Dyvik
Research expert covering Nordics and global data for society, economy, and politics
Deflation - statistics & facts
Lately, inflation has been a hot topic around the world, with increasing prices and many people facing a cost-of-living crisis. Naturally, less attention has been paid to the opposite phenomenon, deflation, which refers to falling prices. Historically, there have been some notable periods of deflation, but these have become fewer and far between in recent decades. What is deflation, what causes it, and what are the most noteworthy historical examples? And which countries are at risk of falling into deflation today?
While deflation may benefit consumers over a shorter period of time, with decreasing goods and services prices, deflation over an extended period is usually bad both for the economy and employees alike. When prices fall, businesses earn less, meaning that they need to reduce costs, which tends to result in lower salaries and rising unemployment. Consumers then tend to save money as their income decreases, further reducing the income of businesses as spending slows. Economies thus risk falling into a vicious cycle of increasing unemployment and deflation. This could be observed both during the Great Depression and in Japan during the 1990s. Moreover, borrowers are particularly affected by deflation, as they have to repay loans with less money.
The cause of the deflation during the Great Depression in the early 1930s was different. Following the Wall Street Crash in October 1929 and the resulting economic downturn, the U.S. and ultimately the global economy entered a period of economic recession. Banks and businesses went bankrupt, and millions lost their jobs. In the U.S., for instance, unemployment rates reached 25 percent in 1933, and prices plummeted as consumer demand fell and millions of people lost their savings overnight.
The Great Recession, which started with the bankruptcy of the Lehman Brothers Bank in 2008 and a collapse of international financial markets, followed some of the same patterns as the Great Depression. While the consequences in the U.S. were less severe than during the Great Depression, many people lost their homes as the housing market collapsed. Some European countries were hit particularly hard because of the crisis. For instance, after the crisis broke out, it became clear that Greece had been underreporting its public debt. Moreover, as a part of the Euro Area, it had limited possibilities to implement fiscal policies on its own to dampen the crisis. The Greek government was forced to implement austerity programs, unemployment rose as government spending was cut back sharply, and the country’s inflation rate was negative from 2013 to 2015.
The Lost Decade initially refers to the 1990s, but as economic stagnation continued following the global financial crisis and Great Recession as well as the Tohoku earthquake and Fukushima nuclear disaster in 2011, experts now speak of decades instead of a decade. Moreover, Japan is struggling with an aging population, meaning a diminishing workforce, which is likely to cause further periods of deflation in the future. Today, the country faces the second-highest debt ratio worldwide. Japan thus stands out as a country struggling with deflation, compared to most other countries that have been struggling with inflation in recent years.
What is deflation?
Deflation refers to the economic phenomenon when the prices of goods and services are decreasing. Deflation can be caused by a range of factors, including a reduction in money supply, increased productivity through technological innovations, a decrease in consumer demand and spending, and an increasing emphasis on savings. A period of deflation related to a reduction of money supply usually follows an economic downturn, which was observed during the Great Depression in the early 1930s and following the Great Recession in the late 2000s and early 2010s. Deflation must not be confused with disinflation, which refers to slowing inflation rates.While deflation may benefit consumers over a shorter period of time, with decreasing goods and services prices, deflation over an extended period is usually bad both for the economy and employees alike. When prices fall, businesses earn less, meaning that they need to reduce costs, which tends to result in lower salaries and rising unemployment. Consumers then tend to save money as their income decreases, further reducing the income of businesses as spending slows. Economies thus risk falling into a vicious cycle of increasing unemployment and deflation. This could be observed both during the Great Depression and in Japan during the 1990s. Moreover, borrowers are particularly affected by deflation, as they have to repay loans with less money.
How improved productivity and a lack of money supply cause deflation
Throughout history, there have been several periods of deflation. In the United States, for instance, there was a major fall in the prices of agricultural commodities in the early 1800s due to an improvement in agricultural production and better transportation methods. Improved transportation methods were also the main cause of the so-called Great Deflation from around 1870 to around 1890, as the Suez Canal opened and a shift to steamboats reduced transportation costs significantly. During this period, global goods prices decreased by around two percent annually, although national economies and real wages grew. Hence, people’s economic situation improved significantly during this period, but many businesses struggled and went bankrupt.The cause of the deflation during the Great Depression in the early 1930s was different. Following the Wall Street Crash in October 1929 and the resulting economic downturn, the U.S. and ultimately the global economy entered a period of economic recession. Banks and businesses went bankrupt, and millions lost their jobs. In the U.S., for instance, unemployment rates reached 25 percent in 1933, and prices plummeted as consumer demand fell and millions of people lost their savings overnight.
The Great Recession, which started with the bankruptcy of the Lehman Brothers Bank in 2008 and a collapse of international financial markets, followed some of the same patterns as the Great Depression. While the consequences in the U.S. were less severe than during the Great Depression, many people lost their homes as the housing market collapsed. Some European countries were hit particularly hard because of the crisis. For instance, after the crisis broke out, it became clear that Greece had been underreporting its public debt. Moreover, as a part of the Euro Area, it had limited possibilities to implement fiscal policies on its own to dampen the crisis. The Greek government was forced to implement austerity programs, unemployment rose as government spending was cut back sharply, and the country’s inflation rate was negative from 2013 to 2015.
Japan’s Lost Decade(s)
In Japan, the so-called Lost Decade – which later turned into decades – stands out as a prolonged period of economic stagnation and deflation. Following decades of economic growth, after the country lay in ashes after World War II, the Asian country entered a period of recession in 1991, when an asset price bubble burst following years of uncontrolled investments and speculation in the 1980s. To combat the economic downturn, the Bank of Japan lowered the interest rate to zero to stimulate spending. However, most Japanese opted to hold on to their savings in fear of further economic stagnation, which exacerbated the crisis and led to a prolonged period of deflation. This example shows how deflation can cause a vicious circle, as described above.The Lost Decade initially refers to the 1990s, but as economic stagnation continued following the global financial crisis and Great Recession as well as the Tohoku earthquake and Fukushima nuclear disaster in 2011, experts now speak of decades instead of a decade. Moreover, Japan is struggling with an aging population, meaning a diminishing workforce, which is likely to cause further periods of deflation in the future. Today, the country faces the second-highest debt ratio worldwide. Japan thus stands out as a country struggling with deflation, compared to most other countries that have been struggling with inflation in recent years.
Is China falling into deflation?
Lately, economists have turned their attention to China as the country’s inflation rate has been balancing around zero since early 2023, even falling below zero in the last months of that year. However, the inflation rate has been marginally positive since February 2024, but experts are still concerned about the state of the Chinese economy. The Chinese real estate market, which makes up an important part of the country’s economy, is in a crisis, highlighted by the bankruptcy of the real estate giant Evergrande. Recently, videos circulated worldwide of fully finished buildings with apartments in China being demolished as there is no demand for them, and the fall in housing prices contributes to the risk of deflation in the country. Furthermore, China’s heavily export-oriented economy faces challenges in the future as tensions with the United States and other countries intensify, and as the U.S. tries to reduce its trade imbalance with China.
