Inflation and deflation notes

Anything good?

A low to modest amount of inflation is also good for an economy. This is because if consumers believe prices will rise they will purchase now rather than wait and pay more in the future. Therefore, it can be said that inflation helps keep the wheels of an economy turning .

Lead to lower consumer spending and lower economic growth.

As businesses and people feel less wealthy, they spend less, reducing demand.

Effects of inflation

Cost of living increases, making families struggle to keep up as the price of everything increases faster than the take-home pay they receive from employers.

Deflation

Deflation can be defined as the decrease in the general price level of goods and services.

Anything good?

Deflation in certain asset classes can be good, like in the price of consumer goods, especially electronic equipment. This is because innovation in manufacturing, which results in lower prices for many consumer goods. This is technological innovation, and it keeps producers competitive.

Deflation

Deflation slows growth. Deflation slows economic growth. As prices fall, people put off purchases, hoping they can get a better deal later. You've probably experienced this yourself when thinking about getting a new cell phone, iPad, or TV. You might wait until next year, and get this year's model for less. This puts pressure on manufacturers to constantly lower prices and come up with new products. Constant cost-cutting means lower wages and less investment spending. As unemployment rose, demand for goods and services fell. Prices dropped 10% a year. As prices fell, companies went out of business. More people became unemployed.

And, if deflation persists long enough, a depression may follow.

During the Great Depression deflation was present most of the time.

Inflation effects

If people owns fixed-value monetary assets, like savings accounts, and insurance policies; inflation will lessen their real value.

Inflation

If the supply of money grows faster than the demand for it, the result would be too many dollars chasing too few goods which is inflation. When inflation occurs, each dollar of income will buy fewer goods and services than before.

Leaves less money for spending and investment.

Increases real interest rates.

Deflation

Is a decrease in the average of all prices of goods and services in an economy

Inflation

Is an increase in the average of all prices of goods and services in an economy

Problems of deflation

It discourages consumer spending. As prices fall, people put off purchases, hoping they can get a better deal later.

Increase real value of debt.

It increases the real value of money and the real value of debt. Deflation makes it more difficult for debtors to pay off their debts.

How is it determined?

The main measure of inflation in the United States is the Consumer Price Index (CPI). CPI= Consumer Price index CPI is higher=inflation CPI is lower=deflation

conclusion

The opposite of deflation is inflation, which is when prices rise. Both are very difficult to combat once entrenched. Deflation is worse than inflation because interest rates can only be lowered to zero. As businesses and people feel less wealthy, they spend less, reducing demand further. Prices drop in response, giving businesses less profit. Once people expect price declines, they delay purchases as long as possible. They know the longer they wait, the lower the price will be. This further decreases demand, causing businesses to slash prices even more. It is a vicious, downward spiral.

Deflation can occur because of a combination of four factors:

The supply of money goes down. The supply of other goods goes up. Demand for money goes up. Demand for other goods goes down Deflation generally occurs when the supply of goods rises faster than the supply of money