Deflation is the opposite of inflation — prices are falling across the economy. A loaf of bread that cost $3 last year costs $2.80 this year. Sounds great for consumers, right? Actually, deflation is often more dangerous than inflation.
Here is why deflation is scary: when prices are falling, consumers delay purchases ("Why buy today if it will be cheaper tomorrow?"). Businesses earn less revenue, cut wages, and lay off workers. Workers with less income spend even less. This creates a deflationary spiral that is extremely hard to break.
Japan experienced deflation for nearly two decades (the "Lost Decades" from 1991-2010). Despite interest rates at 0%, the economy refused to grow. The Great Depression (1929-33) saw US prices drop 25%. Central banks fear deflation more than mild inflation — it is why they target 2% inflation rather than 0%.