One is that falling prices will lower consumer spending, which would cripple economic growth. Both can be potentially bad for the economy, depending on the underlying reasons and the rate of price changes. Inflation and deflation are terms you hear thrown around a lot but what do they mean and what impact do they have on us? The most common measure of inflation is the consumer price index (CPI). You can learn more about the standards we follow in producing accurate, unbiased content in our. The value of a dollar is determined by its purchasing power, the number of things or services which that money can buy. The average interest rate on a savings or checking account is less than 1%, less than inflation so you are losing money when you have it parked in one of those low yield accounts. If prices keep getting lower, people keep wanting to spend money, waiting for things to become even cheaper. Inflation results in rising prices of goods and services, whereas prices of goods and services decrease in deflation. Accessed Mar. Inflation is an expansion in the total supply of money and credit. Some people consider deflation vs disinflation as the same, which is … As a result, the price of goods and services drops. They argue you can print cash but it doesn’t create inflation if no one wants to borrow it. Inflation vs. Stagflation: An Overview . Deflation is usually seen during a recession. Most of the world's central banks target modest levels of inflation, at around 2%–3% per year. Prices are dropping so people will buy more and people buying things is what drives the economy. Inflation is often seen as a big threat, mostly by people who came of age during the late 1970s, when inflation ran wild. So-called hyperfinflations occur when the increase in monthly prices exceeds 50% over some period of time. The GDP price deflator measures the changes in prices for all of the goods and services produced in an economy. In economics, deflation is a decrease in the general price level of goods and services. No one knows how long this transition from deflation to inflation will take, but we believe it will be less than two years. There are two price indexes used to measure inflation, consumer price index and producer price index. Deflation occurs when the inflation rate falls below 0%. Copyright © 2020 Listen Money Matters. That can impact domestic producers and in turn, their employees. Consumers have less incentive to spend money today when they can reasonably expect that their money will have more purchasing power tomorrow. "Japanese Fiscal Policy: A Bridge to Nowhere?" Inflation or deflation, most of us are going to get poorer. Cost-Push Inflation:If the cost to produce a good increase, a company increases the price to maintain their profit margin. Demand-Pull Inflation: This is caused when there is an increased demand for something which drives up the price. Inflation is an increase in the general prices of goods and services in an economy. Aug. 13, 2020 11:22 AM ET. The Fed slows growth by tightening the money supply, they allow less credit into the market. Hence both are the two side of the same coin and form an integral part to maintain the economic stability of an economy. Based on these scenarios, concepts such as inflation, deflation, and disinflation come into the picture. What is Deflation and How Does it Impact us. As opposed to rising price levels, an economy experiencing deflation is seeing prices drop. Deflation is the opposite -- a contraction in the total supply of money and credit. What are the prospects for inflation in developed economies? Prolonged periods of deflation can stunt economic growth and increase unemployment. 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