Deflation is a term that derives from the French déflation, although its most distant antecedent is found in the English language: deflation. However, it seems that the oldest etymological origin of that word is found in Latin. And it is that it is made up of three parts of said language:
- The prefix “de-“, which is used to indicate a separation or a descent.
- The verb “flare”, which is synonymous with “inflate”.
- The suffix “-cion”, which is indicative of “action”.
This concept is used in the field of economics to name the fall in prices that, in general, is caused by a situation of economic recession.
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It can therefore be considered that deflation is the opposite of inflation, a word that is used to name the rise in prices that occurs in a given economy.
For deflation to exist, the drop in prices must be generalized and must last for at least twelve months (according to what various financial organizations postulate). Typically, deflation is caused by a drop in demand for goods and services : low demand means that producers are forced to lower prices to try to seduce buyers and increase sales.
Once the deflation process starts, it can be very difficult to reverse. The fall in prices means that entrepreneurs make less profit, something that often leads to layoffs and a setback in investment. As the number of unemployed increases, demand continues to fall, which favors even sharper falls in prices.
In these times of economic crisis that many countries are experiencing, Spain is a clear example of a situation of deflation. Specifically, this has caused a precipitous drop in prices in the nation in many areas, as well as other very harsh consequences such as the growth of what has been called “garbage” jobs or the increase in the number of young people in the country who have had to go abroad in order to find a job and economic stability.
The government, faced with a situation of deflation, can promote credit and increase public spending with the intention of bringing dynamism to the economy and getting citizens to consume again.
Other measures that can be taken to deal with a deflation process are lowering the price of money, reducing taxes and even increasing transfers.
This year, for example, the ECB (European Central Bank) has seen the need to undertake various actions in order to deal with the deflation that is being recorded in various corners of the continent. For this reason, it has not hesitated to undertake the lowering of interest rates in the euro zone, the implementation of measures to boost credit to companies or weekly auctions so that banks can obtain liquidity.