Deflation in an economy can be attributed to more than one factor, including:
A fall in the price of goods and services increases the purchasing power of the people. This might present a positive picture in the short run. However, if this effect extends, it leads to deflation, adversely impacting the economy. With deflation, prices and wages begin to fall. Consequently, the supply of money shrinks, resulting in even lower prices and wages. This creates a vicious 'deflationary spiral' of negatives, including declining profits, closing factories, shrinking incomes and employment and a rise in defaults on loans by individuals and companies. Deflation creates a liquidity trap in the economy when lower interest rates fail to stimulate spending. Deflation usually occurs during recessionary times and tends to aggravate its negative effects.