Inflation vs Deflation
Inflation is a common phenomenon in modern times and is seen in nearly all economies. It is a situation where prices of commodities increase with a simultaneous decrease in the value of the currency. If you buy a product for $100 and then go to the market next year to buy it again, you are surprised to see it selling for $110. It is a result of inflationary forces while erosion in the value of dollar. There is no unison among economists when it comes to a universally accepted definition of inflation. While some define it as rise in prices, others prefer to call it erosion in the value of currency. Deflation is another situation that is exact opposite of inflation. If the same product is available at $95 next year, you would be pleasantly surprised but it is because of deflation. Let us see the differences between inflation and deflation.
Deflation is characterized by a contraction or shrinking purchasing power. It is a condition where prices are falling but there is a corresponding decrease in employment, total output, and thus income. Though it may be a matter of happiness that prices are falling, but deflation is regarded as bad for the economy just as inflation. In comparison, deflation is considered to be more evil than inflation.
Inflation affect poor more than rich and incomes are redistributed in favor of rich. Thus it leads to an increase in inequality in the society which is seen as rich becoming richer and poor becoming poorer. It is regressive in nature and hits middle and lower classes. Inflation is demoralizing and makes people think of earning more by speculation and gambling. Thus productivity goes down while speculation increases. Savings of people are hit hard as there is erosion in their net worth.
Deflation on the other hand, by causing falling prices, makes capital less efficient. When manufacturers do not see prices rising, they tend to shy away from production and investing less, leading to unemployment. Economic activities slow down and depression sets in the economy. Output of economy shrinks and even with falling prices, people find it hard to sustain. Profits tumble, producers suffer losses, and economic activities come to a stand still leading to mass scale unemployment. Deflation thus seriously affects income levels.
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In brief: Inflation vs Deflation • Inflation, though it leads to increase in prices and redistribution of income in favor of the rich, is a lesser of the evil than deflation. • Inflation does not lead to lowering of national income which deflation does • Deflation causes wide scale unemployment which inflation does not • As deflation causes profits to tumble, pessimism sets in thus leading to a slowing down of economy and output • It is possible to control inflation through many monetary policies while it is very difficult to reverse the process of deflation • In fact, mild inflation has been seen as good for economy as it leads to economic development. All economists however feel that inflation should not be let out of control which can have devastating effects on economy. |