Inflation vs 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.

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.

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, the bad debts of the banks increase. These banks reduce the number of loans sought by creditors, thus, in turn, reducing the liquidity in the economy. Thus, deflation is a vicious cycle.

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

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 margin.

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 Calculation (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 change 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. 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.

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.

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 –

• Economic Factors Examples
• ROE vs ROA
• Purchasing vs Procurement Differences
• Hyperinflation