Deflation may lead to a permanent increase in the unemployment rate given certain causes of the deflation

Deflation by definition is a decrease in the general price level, which may be caused by a cut in the money supply, a decrease in costs of production and many other reasons. Deflation is a bad sign of the economic performance. When there is a deflation, there will be a decrease in the number of financial activities as well as consumption. However, such phenomenon can lead to an increase in the unemployment rates. When the deflation is caused by factors such as a decrease in costs of production, firms will cut their labour force and maintain or even reduce their previous production levels. Then the deflation problem can be solved as there is no excess supply in the market. The inflation level will be amended to the normal level; however, the unemployment rate increases permanently. Therefore, we may see increases in both the unemployment rate and the inflation rate, which violates the Phillips curve.