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- CNBC Deflation is a decrease in the general price level of goods and services. It is the opposite of inflation, which is an increase in the general price level. Deflation occurs when the inflation rate falls below 0 percent. The most extreme form of deflation is a prolonged period of falling prices, called a deflationary spiral. This occurs when the deflationary forces become so strong that they cause a continuing fall in prices, leading to a decrease in demand, which leads to even lower prices and so on. This can be very damaging to an economy, as it reduces economic activity, leading to job losses and even a recession. Deflation can be caused by a decrease in the money supply, a decrease in government spending, or a decrease in aggregate demand. The most famous example of deflation was the Great Depression of the 1930s.