Inflation and Deflation

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Inflation and Deflation


Inflation is when prices rise whereas, Deflation is when prices fall. You can have both inflation and deflation at the same time. In simple words, Inflation is a general increase in all prices across an economy, while deflation is a general decrease in all prices across an economy. 

When taken to their extremes, both are bad for economic growth, but for different reasons.
Most countries experience a slow increase in the overall price level, or inflation.  Deflation, however, is much rarer than inflation and typically occurs during periods of depression

Type of Inflation
There are five types of Inflation.
  • Hyperinflation
  • Asset Inflation
  • Creeping Inflation
  • Pernicious Inflation
  • Galloping Inflation


Hyper Inflation
Hyperinflation is the worst type of Inflation. That's when prices rise more than 50 percent a month. Fortunately, it's rare. It's only caused by massive military spending. 

Asset Inflation
Which occurs somewhere almost all the time. For example, each spring, oil and gases prices spike because commodities traders bid up oil prices. They anticipate rising demand at the pump thanks to the summer vacation driving season. 
Creeping Inflation
Exists when prices rise 3 percent a year or less. It's somewhat common. It occurs when the economy is doing well. The last time it happened was in 2007.
Walking or Pernicious Inflation 
When prices increase 3-10 percent a year, enough for people to stock up now to avoid higher prices later. Suppliers and wages can't keep up, which leads to shortages or prices so high that most people can't afford the basics.
Galloping Inflation
When prices rise 10 percent or more a year. It can destabilize the economy, drive out foreign investors, and topple government leaders. It's a result of exchange rate fluctuations.

Deflation

Deflation is when prices fall. It can be difficult to spot because all prices don't fall uniformly. During overall deflation, you can have inflation in some areas of the economy. In 2014, there was deflation in oil and gas prices. Meanwhile, prices of housing continued to rise, although slowly. The Federal Reserve measures the core Inflation rate. It takes out the volatile price changes of oil and food.


Causes of Inflation


There are mainly three causes of Inflation.
  • Demand-Pull Inflation
  • Cost-Pull Inflation
  • Over Expansion of Money Supply

Demand-pull inflation
Occurs when demand outstrips supply.

Cost-pull inflation
Which follows when the supply of goods or services is restricted while demand stays the same. For example, since there is a shortage of highly skilled software engineers, their wages skyrocket. 


Overexpansion of the nation's Money Supply
arises when too much capital chases too few goods and services. It's caused by too-expansive fiscal or monetary policy,  creating too much liquidity.



Causes of Deflation

Deflation is caused by a drop in demand. Fewer shoppers mean businesses have to lower prices, which can turn into a bidding war. It's also caused by technology changes, such as more efficient computer chips. Deflation can also be caused by exchange rates.

How to Control Inflation and Deflation
Why Deflation us worse than Inflation

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