Throughout most of the post-war period, the fight against inflation was one of the most important tasks of economic policymakers. For some months now, with ample spare capacity in major advanced industrial countries and inflation receding in the wake of the fall of oil prices, some commentators worry more about deflation than inflation, and draw parallels to the Great Depression. If inflation is defined as a persistent rise in the aggregated price level, then deflation can be defined as a persistent decline in the price level. For analytical purposes, however, it is useful to distinguish between the determinants of a decline in prices: supply-side and demand-side shocks. As a rule, supply-side shocks (a rapid increase in labour productivity or a fall in raw material prices) can easily be absorbed by the economy, because such shocks normally result in increases in output and real wages. Unexpected weakness in demand may, however, result in a serious underutilisation of labour and capital.
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