Deflation

Deflation is the opposite of inflationTermInflation×التضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term: the general price level falls, measured by a consumer price index tracking a fixed basket of goods and services. At negative 2% a year, SAR 100 today has the purchasing power of about SAR 102 in a year's time. Same balance, greater capacity.

Because it makes holding cash a decision that works in your favor, but it creates a trap for borrowers and for the economy as a whole. A current account holding cash gains purchasing power every year at very nearly the rate of deflation, a little more once the gain is divided rather than subtracted, which sounds attractive until the consequences arrive.

Deflation punishes anyone who borrowed money. A loan taken at a fixed rate becomes harder to repay as prices fall, because the income used to service it shrinks while the debt stays the same. A business that borrowed to expand faces falling revenues and rising real debt simultaneously. This is why deflation, despite making cash valuable, typically arrives alongside economic contraction and job losses. The purchasing power gain is real, but it comes because the economy is shrinking, not because you have become wealthier.

It also creates a perverse incentive to delay spending. If prices are falling, there is a rational reason to wait: the same item will cost less next month. When enough people delay, demand falls further, prices fall faster, and the incentive to wait grows stronger. This feedback loop is what makes deflation economically dangerous, even though it appears to benefit savers.

• Deflation is rare in modern economies. Central banksTermCentral bank×البنك المركزيThe government's bank, which controls the money supply, sets interest rates, and oversees all other banks in the country.Open the term actively work to prevent it because the economic damage outweighs the benefit to savers.
• A pay cut in nominal terms (your salary falls) is worse in deflation than in inflation, because prices are also falling and your real income may fall faster than your nominal income.
• Deflation and low inflation are not the same. Low inflation (prices rising slowly) is stable; deflation (prices falling) creates the perverse incentives described above.
• Fixed-rate debt becomes more burdensome in deflation, which is why borrowers are hurt and lenders benefit, the opposite of inflation's effect.