Deflation causes prices to fall and currencies to appreciate. Why does purchasing power fall?

The currency circulating in the market decreases, the people’s monetary income decreases, and their purchasing power decreases, which affects prices to fall.

When the Consumer Price Index (CPI) falls for three consecutive months, it means deflation has occurred. Deflation refers to the continued decline in prices, wages, interest rates, food, energy and other prices caused by overcapacity or insufficient demand. Data released by the Bureau of Statistics in July 2012 showed that in June the CPI rose year-on-year, the factory price of industrial products (PPI) fell year-on-year, and the Chinese economy will enter deflation.

Price generally continues to decline; money supply continues to decline; effective demand is insufficient, and the economy is in overall recession. This view is called the "three-element theory."

Extended information

Contrary to inflation, deflation means an increase in consumer purchasing power, but if it continues, it will lead to an increase in debt burden, a decrease in corporate investment income, and passive consumption by consumers. The economy may fall into a vicious cycle in which price declines and economic recession interact with each other.

The harm of deflation is manifested in the following: falling prices secretly increase the liabilities of individuals and businesses, because the actual value of assets held shrinks, while mortgage loans to banks do not decrease. For example, when people buy a house with a mortgage, deflation may cause the value of the house that the buyer owns to be far less than the debt they take on.

When the currency circulating in the market decreases, people’s monetary income decreases and their purchasing power decreases, which affects the price drop and causes deflation. Long-term monetary tightening will inhibit investment and production, leading to higher unemployment and economic recession.

According to the definition of Nobel Prize winner Samuel: A general decline in prices and costs is deflation. Economists generally believe that when the consumer price index (CPI) falls for two consecutive quarters, it means deflation has occurred. Deflation is an unstoppable and continuous decline in prices, wages, interest rates, food, energy and other prices, and all are in a state of oversupply.

Baidu Encyclopedia - Economic Deflation

Baidu Encyclopedia - Deflation