The concept of deflation is contrary to that of inflation. The term 'Deflation' refers to a reduction in the general price level, over a span of time. However, from the economist perspective, Deflation sometimes may also mean a fall in the size of money supply. This condition is referred to as the 'Contraction' of money supply. The purchasing power of money enhances under Deflation. However, in the contemporary economic system, Deflation is considered to be a threat, owing to the possibilities of a deflationary spiral to emerge.
Nature of Deflation:
Deflation is viewed as a continuous process of decrease in some of the normally-followed collective indicator of price movements, like the GDP deflator or the Consumer Price Index (CPI). In general cases, a one-time reduction in the price levels does not necessarily hints at the initiation of Deflation. In fact, for Deflation to affect an economy, there must be a persistent fall in the prices for more than a year's time.
Effects of Deflation:
Under Deflation, when the price fall persists, it normally creates a spiral of negative attributes comprising accelerative defaults on loan, reduction in incomes and increase in unemployments, downturn of profits and closing down of factories and manufacturing units.