MUMBAI: Major economies of the world are staring at the threat of deflation, an economic state where there is decline in general price levels, often caused by a reduction in the supply of money or credit, according to a recent Citi report.A term opposite of inflation, deflation has often had the side effect of increasing unemployment, since the process often leads to a lower level of demand in the economy.It should be remembered in this context that the wholesale price index (WPI - denoting inflationary pressure in India) dipped to a 13-month low, opening the door for RBI to reduce its interest rates. According to finance ministry, the WPI inflation rate fell to 3.92% in the week ended February 7 from 4.39% in the previous week.The threat of deflation is likely to become more serious as global economic activity slows in the first half of this year. ���Those areas where we forecast outright deflation this year include US, Japan and China. However, many economies are at risk of experiencing falling consumer prices,��� the Citi report added.Economies like Japan, US, China and Europe are already under deflationary pressure with the consumer price index (CPI - like WPI - denotes inflation trends in western countries) dipping very near or well below the 1% mark.In an interview to ET a few weeks ago, John Praveen, chief investment strategist, Pramerica International Investment Advisors said: ���Headline inflation is likely to dip to around zero (in Y-o-Y terms) in US and Europe in early 2009, fuelling deflation fears. However, this trend is likely to dissipate as developed economies pull out of recession. The Indian government will not let the country slip into a deflationary situation; it will jerk the economy up by have more interest rate cuts.���One encouraging aspect for investors is that equity market performance during previous periods of deflation has not been as dismal as many believe. Stock market performance during periods of deflation looks to be driven by the strength of real economy/earnings and valuations. Those investors worried about sustained deflation should consider companies which offer pricing power, volume growth and strong balance sheets, the Citi report said.According to Puneet Nanda, CIO, ICICI Prudential Life Insurance, even though inflation is dipping at a good pace, it is not likely to move into a deflationary or degrowth zone.���The government will hook inflation in and around 2-3%; it is will try to kick-start the economy by cutting rates and announcing fiscal packages (by the new government). In all probability, there is going to be a coalition party at the Centre post general election. If the newly-elected government is headed by either of the two national political parties, there shouldn't be anything for India Inc to worry about. Only a highly-fragmented coalition can scare corporate India and markets,��� Mr Nanda said.