Deflation
Deflation is a general decrease in the price of goods and services in an economy over time.
Deflation is a general decrease in the price of goods and services in an economy over time. This results in higher purchasing power for the relevant currency. Deflation is rare in modern economies, occurring most often during recessions.
Short-term deflation can have varying effects on the economy. Long-term deflation is generally bad for an economy. Deflation is the opposite of inflation.
Deflation is generally measured based on the prices of goods and services. These products’ prices are tracked by a weighted average market basket of many items, known as the consumer price index (CPI). There are several possible drivers of deflation.
If the money supply decreases, then the value of a currency will go up, which lowers prices. Alternatively, a sudden increase in the supply of goods and services will cause a lower equilibrium price, even though the value of the currency was unchanged. A lower equilibrium price will also occur when the demand for goods and services goes down, as was the case in the early stages of the COVID-19 crisis.
Regardless of the value of the currency, lower demand will force merchants to lower prices to stay competitive, resulting in deflation.
Deflation is a macroeconomic concept that influences monetary policy, asset valuations, and investment decisions worldwide. Onramp's glossary explains Deflation in the context of Bitcoin's role as a potential hedge against traditional economic risks and monetary policy changes.
Frequently Asked Questions
What is Deflation?
Deflation is a macroeconomic principle that describes conditions or measurements within the broader economy. It influences central bank decisions, government policy, and investor behavior across all asset classes.
How does Deflation relate to Bitcoin?
Bitcoin's fixed supply of 21 million coins positions it as a potential counterbalance to economic forces described by Deflation. Many investors turn to Bitcoin as a hedge when macroeconomic conditions shift.
How does Onramp help investors navigate Deflation?
Onramp provides Bitcoin financial services including custody, IRA accounts, and educational resources that help investors understand how macroeconomic factors like Deflation may affect their portfolio strategy.
