The subject of this research is the impact of deflation on GDP. Deflation or negative inflation is phenomenon that is characterized by a drop in the general level of prices. Although it seems like a desirable phenomenon, actually it can be a structural and long-term problem which leaves the larger consequences for the economy than inflation. Sustained deflation increases the value of money and has positive effect in short term, but in long term it affects on delayed purchase, fall in agreggate demand, rise of unemployment and decline in economic activity. Deflation brings the risk of deflationary spiral phenomenon and possibility of getting caught in liquidity trap. Global financial crisis „supported by“ austerity policy and decline in energy prices, affected on deflation phenomenon, both worldwide and European Union including Republic of Croatia. Deflation represents special risk for overindebted economies, which due the spending reduction affected by deflation, have no funds to paying debts. Timely manner and regularly use of appropriate stimulus measures, deleveraging processes, unconventional monetary policy of quantitative easing, fiscal stimulus and structural reform can affect on reduction of deflation and economic recovery.