One of the greatest fears present in popular economic thought is that of deflation, which economists define as falling prices. According to these mainstream thinkers, deflation is a serious threat because of the potential for a deflationary spiral, in which people stop spending money due to expected lower prices. When people stop spending, revenue drops, unemployment increases, and a recession ensues.
But is this really the case? Is deflation really all that bad?
In short, no. In fact, if we adhere to the Austrian school of economics, we see falling prices as a healthy sign; an indication that the market is correcting the boom phase of the business cycle. Deflation is simply the symptom of a preceding inflation, during which prices rise to an unsustainable level due to credit expansion. Therefore, once credit contracts (as it must at some point), prices necessarily fall as the money supply shrinks. Deflation, then, is a consequence of loose monetary policy, and is required in order for an economy to recover from a bursting bubble.
Continuing our adherence to the Austrian school, we know that prices are not the drivers of inflation and deflation. Money is the true catalyst. This is why Austrians define inflation and deflation