Consider the following:

- I create a digital coin. There are 100 of them, fixed. Never any more.

- One person has 10 of these coins.

- Said person drops his phone in the toilet, ruining his key. Or he forgets his passphrase.

- His coins are effectively GONE from the system. They are cryptographically impractical to recover, and if they can be recovered, then the whole system is broken.

- There are now 90 coins, where there were once 100.

- The currency has deflated.

Now replace "100" with "21 million" and you have Bitcoin. It deflates over time.