Stock Market Glossary
Deflation
Continuing falling price levels that can paralyze consumption and investments.
In brief: Continuing falling price levels that can paralyze consumption and investments.
Meaning in practice
Deflation is dangerous because consumers and businesses postpone purchases and debts are harder to repay in real terms. Central banks usually combat them with aggressive monetary policy – Japan is the most prominent study object.
Context for investors and traders
As a macroeconomic term, it describes an environment that can affect many companies and asset classes at once. The link to an individual price is rarely direct because expectations, valuations and the market phase also matter.
How to use this in practice
Macroeconomic data often work through expectations: the release matters alongside the forecast gap and the response of rates, currencies and risk premia. The same news can therefore be read differently in different market phases.
What to keep in mind
Do not derive a short-term portfolio shift from one economic data point. A long-term plan, sufficient liquidity and diversification are more robust than trying to time every economic or monetary-policy turning point.
