In economics, deflation is a decrease in the general price level of goods and services.
Deflation occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money, allowing one to buy more goods with the same amount of money. This should not be confused with disinflation, which is a slow-down in the inflation rate (i.e. when inflation decreases, but still remains positive).
As inflation reduces the real value of money over time, conversely, deflation increases the real value of money. Deflation most commonly happens during economic downturns. It has a couple of key negative effects. One is that it erodes the value of many assets, such as one's home and investments. If you have borrowed money in the past you will have to pay that money back with interest already, but unlike inflation where there is too much money in the system, with deflation there is too little. This makes money much more difficult to come by and therefore more difficult to earn.
Problematic levels of deflation are most commonly caused by a significant shrinking of credit and money in the economy. The thing with deflation is that it usually comes because of bubbles popping. As with the recent crisis, the only reason we would potentially have deflation is because we had so much inflation. One causes the other. Again, with sound banking and money we would never have much inflation or much deflation but only minor moves either way. It is rapid expansion of federal reserve and bank created credit followed by rapid contraction that creates this environment.