Inflation vs Deflation: Difference and Comparison

Inflation and deflation are virtually the same thing but from different perspectives. Inflation could be comprehended as the steep increase in the overall consumer prices over services and goods.

Other economists describe it as a continuous rise in the value of a number of things, whereas others say it is a situation in which the value of the currency is declining or fast degrading.

It may appear simple, but there are numerous elements to both commercial terms. So, by contrasting inflation and deflation side by side, this article will ensure that all questions about inflation and deflation are dispelled.

Key Takeaways

1. Inflation indicates a sustained increase in the general price level of goods and services, leading to a decline in purchasing power.
2. Deflation represents a sustained decrease in the general price level, increasing the purchasing power of money.
3. Policymakers employ monetary and fiscal policies to manage inflation and deflation to maintain economic stability.

Inflation vs Deflation

Inflation refers to a sustained increase in the general price level of goods and services over a given period due to an increase in money supply. Deflation refers to a sustained decrease in the general price level of goods and services over a given period, increasing the purchasing power of money.

Inflation is defined as a condition wherein the market price of products and services rises, resulting in a drop in buying power in the mediocre market segment or a reduction in the purchasing power of the nation’s currency.

On the other hand, deflation is a condition that arises in the economic cluster due to a decrease in the supply of money or credit. This is also referred to as negative inflation since deflation occurs when the rate of inflation is zero percent.

With the advent of deflation inside the country’s economic growth, there is a downward shift in the level of prices, i.e., the cost of products and services lowers dramatically, causing an increase in the currency’s purchasing power.

Comparison Table

Parameters of Comparison	Inflation	Deflation
Meaning	Inflation is defined as a condition wherein the market price of products and services rises, resulting in a drop in buying power in the mediocre market segment.	Deflation is a condition that arises in the economic cluster as a result of a decrease in the supply of money.
Impact OD	Demands and necessities increase from the consumers towards the producers and manufacturers.	Decreases demand from the consumers towards the manufacturers.
Consequences	Distribution of wealth and the gap between poor and rich people increases.	Unemployment and equity in buying power of moderate people increases.
Buying Power	Buying power of currency decreases.	Buying power of currency increases.
National Income	Stays unaffected	National revenue and income decreases eventually.

What is Inflation?

Inflation is a measure of the rate at which the price in a nation’s economy rises. Inflation occurs whenever commodities and activities are in short supply and high demand, resulting in a decrease in supply.

Many factors can cause a drop in supply; for example, a catastrophic event can destroy a staple crop, a housing boom can deplete construction materials, and so on.

Consumers are prepared to pay more for the products they desire, forcing producers and service providers to raise their prices.

The rate of change in the consumer price index is by far the most commonly used metric of inflation or hyperinflation. The Consumer Price Index (CPI) is a notional basket of items that includes items and services, medical care, and freight costs.

The government monitors the prices of the basket’s commodities to determine the spending power of the capital.

Inflation is frequently regarded as a major concern, particularly among those who grew up until the late 1970s, when inflation was rampant. Economic collapses occur when the rise in weekly prices reaches 50% over a set period.

A collapse frequently follows such episodes of fast price increases in the underlying financial sector and may also be followed by an abrupt increase in supply.

What is Deflation?

Deflation is more harmful since it reduces net capital efficiency. As little more than a result, both investment and employment are down. Income has been significantly reduced as a result of dropping prices.

As a result, contracting firms will no longer have quite enough cash to pay their employees, leading to layoffs.

As a result, even if the costs of products and services fall drastically, the bulk of the population will still be unable to purchase them due to diminished purchasing power.

Eventually, demand for these things falls precipitously, which is unfavourable for the vast majority of individuals.

Deflation happens when too many products are available, or insufficient money is in circulation to acquire those items. As a result, the price of things decreases.

For example, if a certain model of a car becomes even more popular, other manufacturers will begin to produce a similar model in strategies to succeed.

Car firms will soon get more of that automobile style than they could ever sell, therefore, they will have to drop the cost of selling the automobiles.

Main Differences Between Inflation and Deflation

1. Inflation is defined as the rapid and widespread rise in the costs of goods and services, whereas deflation is defined as the steep drop in prices.
2. Inflation does not affect national wealth, whereas deflation reduces national revenue.
3. Inflation reduces a currency’s buying power, whereas deflation improves its buying power.
4. In the inflation phase, the prices of rare metals like gold, silver, and platinum rise, whereas it decreases during deflation.
5. Inflation makes rich people richer and poor people poorer, whereas deflation causes equity among the buyers.

References

1. https://www.financialexpress.com/what-is/inflation-meaning/1618981/
2. https://economictimes.indiatimes.com/definition/deflation

Last Updated : 13 July, 2023