 DEFINITION |
Deflation refers to a persistent tendency, over an extended period of time, for prices and incomes to decline. If deflation persists, businesses may shut down or reduce their production. As a result, unemployment may increase and wage rates may fall. The spiraling effect of deflation on prices and wages may create pessimism, and the economy could fall into a recession.
| HOW
DOES IT AFFECT CANADIANS? |
Severe deflation occurred in Canada in the early 1930s and prices dropped about 20 per cent from 1930 to 1933. During the deflation in the 1930s, businesses incurred huge losses. Mainly lack of demand for their goods and services led them to cut prices further, adding to their losses. As result, the bankruptcy rate was very high, the unemployment rate increased substantially, incomes fell, and economic activity shrank. The result was the great depression.
During the 1970s and 1980s, inflation rather than deflation was a concern in developed countries, including Canada. Double-digit inflation persisted in the early 1980s. In the 1990s and early 2000s, developed countries have been successful in keeping inflation rate low—average since 1990 is around 2 per cent in Canada.
| LINKS |
Agreement on the Inflation-Control Target
Source: Bank of Canada
http://www.bankofcanada.ca/en/inflation/index.htm
Managing Inflation, The Bank of Canada's Role
Source: Bank of Canada
http://www.bank-banque-canada.ca/en/inflation/index.htm
Consumer Price Index Information And Statistics
Source: Bank of Canada
http://www.bank-banque-canada.ca/en/backgrounders/bg-i4.htm
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