Showing posts with label deflation. Show all posts
Showing posts with label deflation. Show all posts

Tuesday, February 17, 2015

Negative Inflation

Image credit: Sofia news agency
Inflation – Deflation 

Inflation is a term which tends to reduce the real value of money over time and deflation increases the real value of money, the currency of a regional or national economy, enabling an individual to purchase more products with the same amount of money overtime. In other words deflation is a situation when the price level decreases and the inflation rate tends to get negative.

Economist are of the opinion that deflation could be a problem in a modern economy since it increases the real value of debt and affects recessions, leading to a deflationary spiral. All episodes of deflations do not correspond with phases of poor economic growth. During the 19th century, deflation took place periodically in the U.S. and this deflation was the result of technological progress creating significant economic growth while at other times was due to financial crises particularly the Panic of 1837 that caused deflation during1844 as well as the Panic of 1873 triggering the Long Depression which lasted till 1879.

These periods of deflation were prior to the establishment of the U.S. Federal Reserve System and the active management of monetary issues. Deflation episodes were rare and brief with the development of Federal Reserve while American economic progress has been unprecedented

Negative Inflation 

Negative inflation is said to be an economic phenomenon wherein the economy tends to move out of an inflationary phase and enters into a phase where there is less money in circulation. Negative inflation tends to occur when the prices fall due to the supply of goods which is higher than the demand for those products.

It is often due to reduction in money, consumer or credit spending and could be the result of a combination of various factors which may include, having excess money in circulation that may decrease the value of money which in turn would reduce prices, with more products manufactured than the demand for the same.

 This could lead to businesses decreasing their prices in order to urge consumers to purchase those products and not having sufficient money in circulation causes those with money to hold on to it instead of spending it and decreased demand for goods decreases spending.

Though it would seem that lower prices are good, deflation could ripple through the economy for instance when it creates high level of unemployment, turning into a bad situation and this type of a recession could turn into a worse situation like a depression.

Leads to Unemployment => Decrease in Spending => Less Demand

Deflation could lead to unemployment since the companies tend to make less money and react on cutting costs to survive which may include in closing of the stores, plants and warehouses and laying-off their workers.

This results in the worker having to decrease on their spending leading to less demand with more deflation causing a deflation spiral which may be difficult to break. Deflation tends to work without affecting the rest of the economy when businesses are capable of cutting the costs of production for the purpose of lowering prices like in the case of technology, since the cost of technology products has reduced over the years though it was due to the cost of producing technology that had decreased and not due to decreased demand.

Tuesday, December 22, 2009

Evils of Inflation and deflation

Let me explain the concept of Inflation and deflation in a simple manner. Inflation and deflation are the terms used to describe the state of a Economy.
Inflation is the word used during price rise of essential commodities. Inflation is nothing but, too much of money chasing too little goods. To put it simply, if there is too much of paper money and less quantity of goods are produced, then too much of paper money would chase too little goods which would automatically increase the price of the commodity.
Inflation occurs when there is more paper money and less end products. There is imbalance between the money printed and the goods produced during inflation. Inflation can be controlled by controlling the printed paper money or producing more of the goods.
The term deflation is used opposite to Inflation. Deflation is a period when too little money chases too many goods. Because of this, the price of the commodities starts falling which will put the producers to get a price lower than their production cost. This is also evil to the economy.

So continous fall or rise of prices would be seen as evil for the economy. Inflation and deflation can be controlled by the Government by increasing or decreasing the Interest rates or by controlling the printing of Currencies.