Why Deflation Is Worse than Inflation

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Why Deflation Is Worse than Inflation?

First of all we should know what is Inflation and what is Deflation.

Inflation


Inflation is sustained increase in the general price level of goods and services in an economy over a period of time. Purchasing power of money is reduced, as we can purchase fewer goods in each unit of currency.

Deflation


Deflation is a decrease in the general price level of goods and services. Deflation occurs when the Inflation rate falls below 0% (a negative inflation rate).

Why Deflation Is Worse than Inflation

Deflation is worse 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 companies 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.

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