Inflation vs. Deflation: Which is Better for the Economy?

Which is Which?

Inflation and deflation are words that you have most definitely heard in discussions about the economy, but what exactly do they mean? Inflation is the increase of prices and deflation is the decrease of them. These can significantly affect consumer purchases, but how do they impact the economy and which one is better overall? 

All About Inflation

Inflation is the rising of prices over a period of time and represents how much more products cost later on. This occurs when the demand for a product outweighs the supply, so companies will increase the prices of said product to generate more profit. Since consumers know that prices will continue increasing later on, they will be more pressured to buy now to not risk spending more in the future. Additionally, if workers predict inflation to occur, they can demand higher wages to be able to maintain their purchasing power in the future.

Dangers of Deflation

On the other hand, there’s deflation, the decrease of prices over a period of time, with products costing less later on. This is the opposite of inflation and is caused by supply outweighing demand, which will cause companies to lower prices to try to increase profits. However, when prices decrease over time, consumers would rather buy items at a lower price, which they assume would be later on, so consumer purchases decrease significantly. Deflation also causes money to be worth less, so debt can be much harder to pay off. 

Comparing the Two

Although it might seem like the obvious answer here is inflation for bettering the economy, it can also be detrimental for it with hyperinflation. This is when there is an extreme increase of prices, around 50% per month, while 2% is considered healthy. This can cause economic instability, as well as social and political unrest. However, over a long period of time, deflation can spiral into long-term stagnation and even cause a recession. In the late 1920s, deflation significantly worsened the economic crisis during The Great Depression.

Final Analysis

Inflation raising prices and deflation lowering them can both impact consumer spending, for better or worse. Knowing these terms can help with financial decision-making when thinking about the value of products later on. Finally, we must remember that too much inflation or deflation can hurt the economy, so balance is the key to foster sustainable growth.