Deflation

A sustained fall in the general price level. It raises the real burden of debt, can hold back spending and, with rates near zero, limits what conventional monetary policy can do.

Where you will meet it

Deflation appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Show how inflation and a firm's competitive standing shape sales and cost forecasts
  CFA Level I · Financial Statement Analysis

  “Where these forces are weak, a firm has pricing power: it can pass input cost inflation through to customers and protect its margin, and in deflation it may hold prices while costs fall.”

• Explain how inflation behaves across the business cycle and what it means for returns on cash, bonds, equities and real estate
  CFA Level III · Asset Allocation

  “With deflation, cash suffers near the zero bound, high-quality bonds gain, and equities and real estate suffer as nominal revenues and asset values fall.”

See also

Monetary policy

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with D · Glossary