This action increases the cost associated with borrowing currency, thereby reducing the demand for goods and services, which in turn reduces or stabilizes the prices of these goods and services. What is deflation - Deflation is the continuous decrease in prices of goods and services. Deflation occurs when the inflation rate becomes negative (below zero) and remains so for a longer period. What are the effects of deflation? - During deflation the price of goods and services continues to fall and during this period consumers will tend to delay their purchases hoping that prices will fall further. This is dangerous as it will lead to lower production, lower wages and a decline in demand and, consequently, lead to a further decrease in prices. This is known as a deflationary spiral. What is the deflationary spiral? - It is a situation in which decreasing prices leads to lower production, lower wages and demand, which can lead to a further decrease in prices. A deflationary spiral occurs when falling prices lead to a vicious cycle (one problem leads to another which exacerbates the first). How inflation is calculated in