Inflation vs. Deflation : What's the Difference?

What is the difference between inflation and deflation? And how do they help to boost the economy? Inflation occurs when the prices of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions, opposite sides of the same coin, is delicate and an economy can quickly swing from one condition to the other. Inflation generally is Price Rise . A rise in general level of prices of goods and services in a economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Thus, inflation results in loss of value of money. Example :If you buy a product for $100 and then go to the market next year to buy it again, you are surprised to see it selling for $110.There are many similar examples like Our grandfather had buy gold in less cost than ours. Deflation is Price Decrease . Deflation refers to situation, where there is decline in general price levels. Thus, deflation occurs when the inflation rate falls below 0% (or it is negative inflation rate). Deflation increases the real value of money and allows one to buy more goods with the same amount of money over time. Deflation can occur owing to reduction in the supply of money or credit. Deflation is characterized by a contraction or shrinking purchasing power. It is a condition where prices are falling but there is a corresponding decrease in employment, total output, and thus income. Example :The same product that you buy $100 and the same product is available at $95 next year, you would be pleasantly surprised but it is because of deflation. Pros and Cons of Inflation and Deflation : Inflation affect poor more than rich and incomes are redistributed in favor of rich. Thus it leads to an increase in inequality in the society which is seen as rich becoming richer and poor becoming poorer. It is regressive in nature and hits middle and lower classes. Inflation is demoralizing and makes people think of earning more by speculation and gambling. Thus productivity goes down while speculation increases. Savings of people are hit hard as there is erosion in their net worth. Deflation on the other hand, by causing falling prices, makes capital less efficient. When manufacturers do not see prices rising, they tend to shy away from production and investing less, leading to unemployment. Economic activities slow down and depression sets in the economy. Output of economy shrinks and even with falling prices, people find it hard to sustain. Profits tumble, producers suffer losses, and economic activities come to a stand still leading to mass scale unemployment. Deflation thus seriously affects income levels. Inflation is a quantitative measure of how quickly the price of goods in an economy is increasing. Inflation is caused when goods and services are in high demand, thus creating a drop in availability. Supplies can decrease for many reasons; a natural disaster can wipe out a food crop, a housing boom can exhaust building supplies, etc. Whatever the reason, consumers are willing to pay more for the items they want, causing manufacturers and service providers to charge more. The most common measure of inflation is the consumer price index (CPI). The CPI is a theoretical basket of goods, including consumer goods and services, medical care and transportation costs. The government tracks the price of the goods and services in the basket to get an understanding of the purchasing power of the U.S. dollar. Inflation is often seen as a big threat, mostly by people who came of age during the late 1970s, when inflation ran wild. In reality, inflation can be good or bad, depending on the reasons and level of inflation. In fact, a complete lack of inflation can be quite bad for the economy. Deflation occurs when too many goods are available or when there is not enough money circulating to purchase those goods. As a result, the price of goods and services drops. For instance, if a particular type of car becomes highly popular, other manufacturers start to make a similar vehicle to compete. Soon, car companies have more of that vehicle style than they can sell, so they must drop the price to sell the cars. Companies that find themselves stuck with too much inventory must cut costs, which often leads to layoffs. Unemployed individuals do not have enough money available to purchase items; to coax them into buying, prices get lowered, which continues the trend. Deflation can lead to an economic recession or depression, and the central banks usually work to stop deflation as soon as it starts. When credit providers detect a decrease in prices, they often reduce the amount of credit they offer. This creates a credit crunch where consumers cannot access loans to purchase big-ticket items, leaving companies with overstocked inventory and causing further deflation. Prolonged periods of deflation can stunt economic growth and increase unemployment. Japan's "Lost Decade" is a recent example of the negative effects of deflation. Inflation, though it leads to increase in prices and redistribution of income in favour of the rich, is a lesser of the evil than deflation. • Inflation does not lead to lowering of national income which deflation does. • Deflation causes wide scale unemployment which inflation does not • As deflation causes profits to tumble, pessimism sets in thus leading to a slowing down of economy and output. • It is possible to control inflation through many monetary policies while it is very difficult to reverse the process of deflation • In fact, mild inflation has been seen as good for economy as it leads to economic development. All economists however feel that inflation should not be let out of control which can have devastating effects on economy.









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