Difference Between Inflation and Deflation
Inflation is a common phenomenon in modern times and is seen in almost all economies. This is a situation where prices of items 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’re surprised to see it sell for $ 110. This is a result of inflationary forces during the erosion in the value of dollar. There is no harmony among economists when it comes to a universally accepted definition of inflation. While some define it as the increase in prices, others prefer to call the erosion in the value of currency. Deflation is another situation that is the exact opposite of inflation. If the same product is available at $ 95 next year, you’d be pleasantly surprised but it is because of deflation. Let us see the differences between inflation and deflation.
Deflation is characterized by contraction or shrinking the purchasing power. It is a condition in which prices fall, but there is a corresponding decrease in employment, total output and as a result income. While this may be a matter of happiness that prices fall but deflation is seen as bad for the economy than inflation. In comparison, we consider that deflation is more evil than inflation.
Inflation affects rich and poor more than the revenues are redistributed in favor of the rich. So it causes an increase in inequality in society as rich becomes richer and poor becomes poorer. It is regressive in nature and affects the middle and lower classes. Inflation demoralizes and makes people think that more can be earned by speculation and gambling. And productivity goes down as speculation increases. The savings of the people are hit hard as there is erosion in their net worth.
Deflation on the other, cause falling prices, making capital less effective. When manufacturers do not see prices rise, they tend to stay out of production and invest less, causing unemployment. Economic activity slows and depression sets in the economy. Production of economy shrinks, even with prices falling, people find it hard to support. The profits fall, producers suffer losses and economic activities come to a halt causing unemployment to mass scale. Deflation seriously affects income levels.