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