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Deflation is a persistent decrease in the general price level, such that overall prices are falling (negative) on a year-over-year basis.

The general price level is measured by the Consumer Price Index (a.k.a. CPI).

If the annual rate of increase in CPI is 3% for example, and it drops to -2%, that is deflation.

Deflation can be highly destructive to an economy. Here’s a short primer on deflation from the Bank of Canada.

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