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Inflation

Inflation measures the rate at which the average price level of goods and services increases, indicating a decrease in purchasing power. Deflation, on the other hand, refers to declining prices, often reflecting lower demand and purchasing power. Historical examples include inflation leading to higher consumer prices over decades and deflation during economic downturns like The Great Recession and The Great Depression.

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7 views1 page

Inflation

Inflation measures the rate at which the average price level of goods and services increases, indicating a decrease in purchasing power. Deflation, on the other hand, refers to declining prices, often reflecting lower demand and purchasing power. Historical examples include inflation leading to higher consumer prices over decades and deflation during economic downturns like The Great Recession and The Great Depression.

Uploaded by

hiimaanshumathhur18
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INFLATION

Inflation is a quantitative measure of the rate at which the average price


level of a basket of selected goods and services in an economy increases
over a period of time. Often expressed as a percentage, inflation indicates a
decrease in the purchasing power of a nation’s currency. As prices rise, they
start to impact the general cost of living for the common public and the
appropriate monetary authority of the country, like the central bank, then
takes the necessary measures to keep inflation within permissible limits and
keep the economy running smoothly.

For example, prices for many consumer goods are double that of 20 years
ago. When you hear your grandparents recall, "A movie and a bag of popcorn
only cost Rs.1.00 when I was your age," they are making an observation
about inflation--the cost of goods and services--over time.

DEFLATION

The simple definition of deflation is an environment of declining prices for


goods and services. In this regard, deflation is the opposite of inflation,
where the cost of goods and services are rising. Understanding the
economics of deflation can make you a better investor.

A recent example of deflation occurred during "The Great Recession" of


2007-2008, where the inflation rate fell below 0%, which means that the cost
of goods and services were declining. On the surface, this may sound like a
good thing for consumers but lower prices are a reflection of lower demand,
which arises from lower purchasing power (consumers are buying less
because they either feel less wealthy or they lost their jobs). An extreme
example of deflation occurred during The Great Depression.

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