Deflation means that generally the prices of products are going down. It is the opposite of inflation. It is said, that deflation happens when there is less money than there are goods (goods are almost any kind of product). It is also said that deflation is a sign of a weak state of that country's economy, because deflation usually happens during an economic collapse. Deflation is thought to be even worse than inflation.
Deflation starts when people are waiting for prices to go down even more. They will then spend less money. Because of that, companies can not afford to keep up the amount of goods that are made, and have to lower that amount, as well as fire workers to make even a small profit.
Even if an economy is growing, there can be some amount of deflation - if the amount of money going around grows slower than the making of goods. There has not been much deflation in the world since the 1930s[source?], except in Japan.
Deflation can be helped by the country's own government by lowering the companies' tax levels, so they can lower their prices while getting the same profit. This way normal people are more encouraged to buy the cheap goods they were waiting for, and slowly the companies can make more profit. Governments do not like deflation, because it means that they can collect less tax.