Inflation vs Deflation

Difference Between Inflation and Deflation

Inflation means an increase in the prices of general goods and services. On the other hand, deflation means a decrease in the prices of goods and services. Hence, both are the two sides of the same coin and form an integral part of maintaining economic stability.

What is Inflation?

The dollar’s purchasing power is determined by the number of goods or services that money can buy. The purchasing power of the Dollar decreases as inflation increases. Thus a person will have to spend more to buy only a little. It also causes a rise in gold prices.

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What is Deflation?

Deflation is when the prices of goods and services fall. It can also be termed negative inflation since the rate is less than 0%.

Since the prices are following a downward trend, the purchasing power of the money increases. That is, people can buy more with less money.

One may think that deflation is good as the prices of goods are low, and people can buy more. But, continued deflation is not for the economy. If the prices keep dropping, the consumers will not buy the goods, expecting and waiting for the prices to drop further. Companies suffer losses if their goods aren’t sold and lay-off their employees as a cost-cutting exercise. When people are unemployed, they spend even less. They may even default on their loans or credits and other obligations. Due to this, theBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more bad debtsBad DebtsBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more of the banks increase. These banks reduce the number of loans sought by creditors, thus, in turn, reducing the liquidity in the economy. Thus, deflationDeflationDeflation is defined as an economic condition whereby the prices of goods and services go down constantly with the inflation rate turning negative. The situation generally emerges from the contraction of the money supply in the economy.read more is a vicious cycle.

Inflation vs Deflation Infographics

Let’s see the top differences between inflation vs deflation.

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Key Differences

The key differences are as follows –

#1 – Cause

Inflation

• Excess money: Excess money or currencies is one of the major causes of inflation. When the money supply in the country grows above economic growth, the currency’s value decreases.
• Demand-pull: Due to an increase in the demand for goods and services, the suppliers may increase the prices.
• Cost-push: When companies face an increased cost of production, they may increase the prices of the goods to maintain their profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more.

Deflation

• Efficient production: Technological innovations make goods more efficient, leading to a drop in prices.
• The decrease in the supply of currency: This will decrease the prices of goods and services to make the product affordable to the mass.

#2 – Measurement

• In India, measurement of inflation is done with the CPI CalculationCPI CalculationThe Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark  point.read more (CPI – computes the changes in the general price level of a class of consumer goods) and Wholesale Price Index (WPI – measures the average change in prices received on the bulk sale of goods).
• When the price changePrice ChangePrice change in finance is the difference between the initial and final values of an asset, security, or commodity over a particular trading period.read more in one period is lower than in the previous period, the CPI index has declined, indicating that the economy is experiencing deflation.

#3 – Effects

Inflation

• In the case of salaried persons, if the percentage rise is less than the inflation rate, it is effectively not rising in the true sense because it does not preserve the purchasing power of your money.
• If inflation in a country is higher than that in its trading partner countries, then the cost of goods for that country is higher than the imported goods.

Deflation

• When the customers postpone their consumption and purchase of goods and services, it affects micro and Macroeconomic factors are those that have a broad impact on the national economy, such as population, income, unemployment, investments, savings, and the rate of inflation, and are monitored by highly professional teams governed by the government or other economists.read moremacroeconomic factorsMacroeconomic FactorsMacroeconomic factors are those that have a broad impact on the national economy, such as population, income, unemployment, investments, savings, and the rate of inflation, and are monitored by highly professional teams governed by the government or other economists.read more. Due to this, the investment is suspended, leading to recession, depression, increased unemployment rate, etc.

#4 – Safeguarding

Inflation

• One of the best ways to secure oneself from inflation is to park your money in long-term investments where the rate of return is higher than the average inflation rate. The stock market and mutual funds would fit these criteria. On the other, the average rate of return on a savings account is generally lower than the average inflation rate.

Deflation

• Deflation is rare, and it also doesn’t last very long. Since deflation can adversely affect the economy, the government quickly takes corrective measures.

Inflation vs Deflation Comparative Table

Basis	Inflation	Deflation
Definition	The prices of goods and services increase	The prices of goods and services decrease
Explanation	The value of the money decreases in the international market	Value of the money increases in the international market
Types	Demand-pull inflationDemand-pull InflationDemand-Pull Inflation is a type of inflation that occurs when the economy's aggregate demand outweighs the economy's aggregate supply, causing prices to rise.read more, cost-push inflationCost-push InflationCost-push inflation is the form of inflation caused by substantial increment in the cost of the factors of production like raw materials, labor, factory rent, etc. And the same cannot be altered as this has no appropriate alternative, which ultimately leads to a decrease in the supply of these inputs.read more, and stagflationStagflationStagflation is an economic scenario where stagnation coincides with inflation.read more	Money supply-side deflation, credit deflation, and debt deflation
Effect	Unequal distribution of income	The unemployment level increases
Which is worse?	A bit of inflation is good for the country/ economy	Deflation is not good for the country/ economy
Safeguarding	Long-term investments	Usually, the government does not let deflation to prevail

Conclusion

An 2-3% inflation rate is usually considered good for economic growth. But a continued decrease in prices leads the economy into a spiral of severe crisis. So, the government takes steps to keep both inflation and deflation in check.

Recommended Articles

This has been a guide to Inflation vs. Deflation. Here we discuss the top differences between them and infographics and comparison tables. You may also have a look at the following articles –

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