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Inflation Risk vs Deflation
Feature	Inflation Risk	Deflation
Definition	The risk that rising general price levels will erode purchasing power and reduce real returns on investments.	A sustained decrease in the general price level of goods and services in an economy over time.
Cause	Excess demand, rising production costs, monetary expansion, or supply shocks.	Weak demand, excess supply, falling wages, or tight monetary policy.
Impact on Consumers	Decreases purchasing power; cost of living rises.	Increases purchasing power; prices and wages fall.
Impact on Borrowers	Beneficial, as debt is repaid with cheaper real money.	Harmful, as debt burden increases in real terms.
Impact on Savers	Negative, as real value of savings declines.	Positive, as real value of money and savings increase.
Effect on Investments	Can erode fixed income returns; equity may hedge inflation.	Can cause investment losses, reduced profits, and lower asset prices.
Monetary Policy Response	Central banks may raise interest rates to curb inflation.	Central banks may lower interest rates or use quantitative easing.
Economic Growth	Moderate inflation can encourage spending; high inflation harms growth.	Deflation often signals economic slowdown or recession.
Wage Impact	Wages may rise but often lag behind inflation.	Wages typically decline or stagnate.
Price Expectations	Expectations of rising prices may fuel inflation further.	Expectations of falling prices may delay spending and investment.
Risk to Economy	High inflation risks hyperinflation and loss of confidence.	Deflation risks prolonged recession and debt deflation spiral.
Examples	1970s stagflation in the US; Zimbabwe hyperinflation.	Japan’s lost decade in the 1990s; Great Depression in 1930s.
Measurement	Measured by Consumer Price Index (CPI), Producer Price Index (PPI).	Measured by negative inflation rates in CPI and PPI.
Effect on Debt	Reduces real debt burden.	Increases real debt burden.
Policy Challenge	Balancing growth and inflation control.	Stimulating demand without causing inflation.