A decline in the general price level most often results from a recessionary (i.e., negative growth) situation in which the demand for goods and services-so-called aggregate demand-contracts. Spending by people and companies, in other words, shrinks. This prompts companies themselves to try to sell their products at lower prices, hoping to stimulate demand and a consumer response.
The result is that companies sell their products at a lower price and thus experience a decrease in sales. To offset this contraction in turnover characteristic of economies in a state of deflation, firms try to reduce costs for raw materials and services derived from other firms, cut labor costs, and squeeze financing from banks (by reducing borrowing costs on debts incurred).
These interventions, in turn, tend to compress aggregate demand for goods and services, aggravating the situation and bringing new deflationary pressures. The growth in unemployment resulting from cutting labor costs, for example, will force the newly unemployed to reduce their spending, negatively affecting demand.
Deflation, however, also tends to be matched by an increase in savings, which can lay the groundwork for a healthy economic recovery.