Deflation

Disinflation and deflation are different as disinflation means the slow downfall of inflation rates. Inflation is harmful to money as the value of money decreases over time but in an deflation the value of money increases. In other words, inflation decreases the buying power of money whereas deflation increases the buying power of money.

Deflation would be wished by many as the 100 rupees that you have today would be more valuable tomorrow but the problem is that the value of debt taken also increases. The young generation is quite credit savvy and hence it could be a very serious issue. Deflation would cause reduced money supply and overall economic activities fall. Deflation happens in an economic depression when there is reduced money supply, reduced money spending, reduced investment and high unemployment rates.

Deflation raises the standard of living for the general public whereas inflation destroys our standard of living. The fall in prices of commodities would literally make us wealthier, as it takes fewer hours of work t pay for the same commodity. The overpriced goods and services also go through a correction have a reduction in prices which are actually close to their worth.

During a deflation, Businesses must significantly reduce the prices of products and labor in order to stay competitive. In order to be competitive businesses usually reduce their prices, their revenues start to drop and as they cut jobs people won’t have jobs. People will stop investing in the business so there is no progress in the economy. Credit and borrowing also become more expensive and due to this developmental activities slow down. Hence Government and Banks try to stop deflation from occurring as countries cant borrow then they cant invest it into developmental activities.

Countering a deflation

As a countering measure for deflation, the Central Bank uses the monetary policies to pump money into the economy to stimulate spending. When people start spending as they have a lot of money the demand for goods and services increases and the economy comes back to the right track. The goal of the government is to take the inflation rate above 0%  as moderate inflation levels are required to drive consumption, provide employment and grow an economy. Inflation also makes it easier on debtors as they pay them back the money at a future date where the money is less valuable. This encourages borrowing and lending which again increases spending on all levels and helps the economy grow. However, the increase in inflation over a limit can ultimately cause the economy to go into a recession.

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