You may have heard a lot about inflation and the possibilities of it in the future, but it’s equally important to know about deflation. Deflation is essentially the opposite of inflation and occurs when the amount of money floating in the economy decreases. When this happens, the purchasing power of our money and wages increases and our money is able to go further. Often, a side effect of deflation is price deflation which is what happens when the prices of the goods we buy drop.
Deflation is caused by a drop in the money supply, something the Federal Reserve is charged with influencing in order to maintain a healthy economy. From an investing perspective, deflation makes it less economical for companies to use debt to finance their activities. This makes companies with little debt more attractive for investors during periods of deflation.