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Deflation refers to a decrease in the general price level of goods and services. When deflation occurs, consumers find that the prices of products and services drop over time, which can lead to an increase in the purchasing power of money. As prices fall, the same amount of money can buy more than before, which can stimulate consumption initially; however, prolonged periods of deflation can lead to economic challenges, as consumers may delay spending in anticipation of even lower prices.

This concept is crucial to understanding economic cycles and policies, as central banks often strive to avoid deflation and aim to maintain a stable price level to foster economic growth. In contrast, an increase in the price level of goods and services indicates inflation, a decrease in purchasing power is typically associated with inflation rather than deflation, and an increase in government spending does not directly relate to the definition of deflation.