Deflation vs. Inflation - Economists typically consider inflation to occur when the prices increase over a period of time rather than month to month. On the other hand, deflation is when the average price of goods falls.
In other words, when the inflation rate falls below zero, indicating negative inflation, we know that there has been deflation. Most people don’t know what the difference between the two are. We have compiled some information to help you understand what deflation is.
Although deflation is generally considered a negative thing, it is not always bad. Wells Capital Management chief investment officer, James Paulsen once wrote that good inflation happens when businesses can produce goods at lower costs without losing profits or raising unemployment. This type of deflation would fall under an increase in the supply of goods.
Deflation can be a bad thing for consumers and the economy as a whole. For one, debtors end up paying back debts that were borrowed with higher-valued dollars. This effectively increases the amount of the debt.
When prices go down, consumers delay purchases thinking that prices will continue to fall. As a result, companies make less money, leading them to layoff employees. When unemployment increases, there is lower demand for products because unemployed consumers can’t afford more purchases.
It’s possible for the economy to be experiencing inflation and deflation at the same time. Seldom do the prices of goods and services all increase or decrease simultaneously. Instead, some prices will go up over a period of time, while other prices go down.
In that case, there can be inflation and deflation happening at the same time. One of the government remedies for deflation is to put more money into supply by purchasing securities. Increasing the money supply too quickly can lead to hyperinflation.
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