Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
Deflation or price deflation, is a general decrease in the price level. This may seem like a great thing for shoppers, except that the cause of widespread deflation is a long-term drop in demand. It means that a recession is probably underway.
Source: https://www.investopedia.com/terms
In depression old inventories are sold for a loss. With inflation old inventories are sold for a profit.
Dear Jerry,
From the perspective of the consumer, it´s exactly what happens. And it is what turns this process so dangerous. But I am not going to say why now. Let us expect a little more time to see some more answers, and we discuss.
But it´s a good perspective. Thanks for sharing.
All my best wishes.
AH
Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions is delicate, and an economy can quickly swing from one situation to the other.
Inflation is caused when goods and services are in high demand, creating a drop in availability. Consumers are willing to pay more for the items they want, causing manufacturers and service providers to charge more. Supplies can decrease for many reasons: A natural disaster can wipe out a food crop or a housing boom can exhaust building supplies, among other situations.
Deflation occurs when too many goods are available or when there is not enough money circulating to purchase those goods. For instance, if a particular type of car becomes highly popular, other manufacturers start to make a similar vehicle to compete. Soon, car companies have more of that vehicle style than they can sell, so they must drop the price to sell the cars. Companies that find themselves stuck with too much inventory must cut costs somewhere, which often leads to layoffs. Unemployed individuals do not have enough money available to purchase expensive items, which continues the trend.
When credit providers detect a decrease in prices, they often reduce the amount of credit they offer. This creates a credit crunch where consumers cannot access loans to purchase big-ticket items, leaving companies with overstocked inventory and leading to further deflation. Deflation can lead to an economic recession or depression, and the central banks usually work to stop deflation as soon as it starts.
A minuscule percentage of inflation is reasonable for the economies and it will increase expectations about the future especially producers are concerned. However, deflation signal to the possibility of recession and hence decrease expectations.
Many empirical studies found that high inflation rates negatively affect growth in the medium and long term. There can be no in any country sustainable development with high inflation rates. generally, many economists find that it could result in a country's entering a crisis of high inflation if annual inflation rate exceeds over a certain threshold ( 40%). If the annual inflation rate goes beyond that threshold , there is a possibility of rise of inflation and its risk of further acceleration causes loss of macroeconomic control.
Thank you very much for the kind insights, fellow scientists.
All the best for all of you.
Prof. A. Hess
Neither inflation, nor deflation shall be managed. The prices system is a sensitive mechanism transmitting information about relative scarcity of goods and services. Any artificial interference from authorities undermines the quality of information.
However, as such interferences are common by central banks, they should take into account the velocity of money and its changes before any decision about managing price level is made.
Dear Dr. David,
Thanks for sharing your valuable opinion. Liked your comments!
If I understood you, the Dynamic Equilibrium approach works better than Keynesian interventions... Am I right, or I misunderstood your explanation?
And, one more question: Your statement: " Neither inflation nor deflation shall be managed. The prices system is a sensitive mechanism transmitting information about the relative scarcity of goods and services. Any artificial interference from authorities undermines the quality of information." is underlined by the Racional Markets Theory, isn´t it?
Pls, let me know a little more about what you think.
Thank you very much!
Hess
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