Inflation vs Deflation

Difference Between Inflation and Deflation

Inflation means the increase in the prices of general goods and services Deflation, on the other hand, means the decrease in the prices of goods and services. Hence both are the two side of the same coin and form an integral part to maintain the economic stability of an economy.

What is Inflation?

The purchasing power of the Dollar 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 in order to buy only a little. This also causes a rise in gold prices.

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What is Deflation?

Deflation is where the prices of goods and services are falling. It can be also termed as 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 are able to 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 a 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 as a cost-cutting exercise, lay-off their employees. When people are unemployed, they spend even less. They may even default on their loans or credits and other obligations. Due to this, the 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 a decrease in the prices of goods and services caused by negative inflation (below 0%). It usually results in increased consumer purchasing power, owing to a simple supply and demand rule in which excess supply leads to lower prices.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
Deflation
  • Efficient production: Technological innovations make the production of goods more efficient, leading to a drop in prices.
  • The decrease in the supply of currency: This will lead to a decrease in the prices of goods and services to make the product affordable to the mass.

#2 – Measurement

#3 – Effects

Inflation
  • In the case of salaried persons, if the percentage raise is less than the rate of inflation, then 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 purchasing of goods and services, it affects both, the micro, and macroeconomic factors. Due to this, the investment is suspended leading to recession, depression, an increase in the 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 rate of inflation.
Deflation
  • Deflation is rare and it also doesn’t last very long. Since deflation can have adverse effects on the economy, the government quickly takes corrective measures.

Inflation vs Deflation Comparative Table

BasisInflationDeflation
DefinitionThe prices of goods and services increaseThe prices of goods and services decrease
ExplanationValue of the money decreases in the international marketValue of the money increases in the international market
TypesDemand-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 inflation, and stagflationStagflationStagflation is an economic phenomenon characterized by high inflation, rising unemployment, and slow economic growth or recession. In this situation, the GDP slows down and the prices of essential commodities increase.read moreMoney supply-side deflation, credit deflation, and debt deflation
EffectUnequal distribution of incomeThe unemployment level increases
Which is worse?A bit of inflation is good for the country/ economyDeflation is not good for the country/ economy
SafeguardingLong-term investmentsUsually, the government does not let deflation to prevail

Conclusion

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

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