The Key Difference Between Inflation and Deflation

xxxxxxxxxx
Feature Inflation Deflation
Definition A sustained increase in the general price level of goods and services over time. A sustained decrease in the general price level of goods and services over time.
Effect on Purchasing Power Reduces purchasing power of money; each unit buys fewer goods. Increases purchasing power of money; each unit buys more goods.
Causes Demand-pull inflation (excess demand), cost-push inflation (rising input costs), monetary expansion. Decline in demand, excess supply, contraction of money supply, technological improvements reducing costs.
Economic Growth Impact Moderate inflation often signals growing economy; high inflation can hurt growth. Generally associated with economic slowdown or recession.
Interest Rates Central banks may increase rates to control inflation. Central banks may lower rates to stimulate demand and avoid deflation.
Effect on Debt Reduces the real value of debt, benefiting borrowers. Increases the real value of debt, burdening borrowers.
Effect on Savings Savings lose value if interest rates are lower than inflation. Savings gain value as money appreciates.
Effect on Wages Wages may rise, but often lag behind inflation causing reduced real income. Wages often stagnate or fall due to lower demand for labor.
Consumer Behavior May spend more quickly to avoid higher future prices. May delay purchases anticipating lower prices.
Business Impact Higher costs can squeeze profit margins; uncertainty may reduce investment. Lower revenues and profits; inventory buildup; layoffs common.
Government Policy Response Monetary tightening, fiscal austerity to curb inflation. Monetary easing, fiscal stimulus to boost demand.
Examples 1970s oil crisis inflation, hyperinflation in Zimbabwe. Great Depression era deflation (1930s), Japan’s deflation in 1990s–2000s.
Impact on Stock Market Mixed; moderate inflation can boost profits, high inflation hurts valuations. Generally negative; deflation increases uncertainty and lowers corporate earnings.
Measurement Measured by Consumer Price Index (CPI), Wholesale Price Index (WPI), Producer Price Index (PPI). Measured by declining CPI, WPI, or PPI over time.
Psychological Effect Can cause expectations of further price rises, fueling more inflation. Creates fear of falling prices, discouraging spending and investment.
Effect on Currency Can lead to depreciation of currency value. Can cause currency appreciation.
Impact on Imports & Exports Exports may become less competitive due to higher prices. Exports may become more competitive due to lower prices.
Risk of Hyperinflation / Deflationary Spiral Risk of runaway inflation causing economic collapse. Risk of deflationary spiral leading to prolonged recession.
Impact on Real Estate Property prices tend to rise with inflation. Property prices tend to fall during deflation.
Summary Inflation represents rising prices eroding money’s value but can signify growth. Deflation represents falling prices increasing money’s value but often signals economic trouble.
Inflation vs Deflation
TRENDING