Deflation vs Inflation Source: They even hinted at the possibility of deflation. What is deflation and why does it strike fear into economists and policy makers? Deflation is simply a fall in the general price level.
In April of this year: US core consumer prices rose by a mere 0.
And in Japan, which has battled falling prices for more than a decade, they fell by 1. Deflation in Japan It may seem good if prices fall, but generally falling prices is bad for the economy. The only real exception is when falling prices are due to rising productivity and technological innovation.
This is why deflation is considered harmful to the economy. When general prices are falling, consumers tend to delay purchasing. For example, rather than buy a flatscreen today, they wait a year when they will be cheaper.
The effect of falling prices is to depress consumer spending leading to lower economic growth. Increasing real value of debt. When people take on debt like mortgages, they expect the value of the debt to be steadily eroded by inflation. A mortgage becomes easier to repay as your wage increases.
When there is deflation, the real value of debts increases. You owe the same, but, your wage is falling. Deflation also increases the real value of government debt. It makes it much more difficult to reduce the debt to GDP ratio.
Furthermore, as deflation tend to reduce economic growth, the cyclical deficit increases. This lack of nominal GDP growth is a key factor in why markets dislike the Greek situation.
Wages are often sticky downwards. Unions resist nominal wage cuts. Therefore, falling prices are often not met by falling wages, leading to a rise in real wages.
This creates real wage unemployment. With deflation, zero interest rates may be too high.
Even quantitative easing may be insufficient to get people spending.Essay on Inflation Causes of Inflation and Deflation Essay AID OF DIAGRAMS, ILLUSTRATE THE CAUSES OF INFLATION AND DEFLATION, AND BY COMPARING THEIR ECONOMIC EFFECTS CONSIDER HOW BOTH CAN AFFECT THE CORPORATE SECTOR.
INFLATION vs UNEMPLOYMENT Which is the Bigger Evil? Therefore, low inflation can help avoid recession and prevent a sudden rise in unemployment.
Inflation discourages investment.
High and volatile rates of inflation can discourage firms from taking long-term investment decisions. • Predict whether the years following the next.
Inflation is when prices rise, and deflation is when prices fall. You can have both inflation and deflation at the same time in various asset classes. When taken to their extremes, both are bad for economic growth, but for different reasons.
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