Inflation (demand-pull and Cost Push),
Hyperinflation, Deflation, Stagnation,
Depression and Disinflation
Understanding the Impact on Your Finances
Dexter Q. Tanzo, CAT, RCA, MICB, CSSWB, MAAT, SM
What
CONTENTIs
AND PICTURE
Inflation?
• Inflation is the increase in the
general prices of goods and
services from one year to
another.
• Inflation reduces the buying
power of a fixed income, as
the cost of goods and services
goes up.
Two kinds of Inflation
DEMAND-PULL INFLATION COST-PUSH INFLATION
• Increased in spending • Increase in Production Cost
• Increased in money supply • Increased in Taxes
• Higher Exports • Increased in Nominal Wage
Interest
CONTENTRates (Nominal vs Real)
AND PICTURE
• Nominal interest rate is the stated interest rate on a
loan or investment.
• Real interest rate is the nominal interest rate
adjusted for inflation, representing the true purchasing
power and the actual return or cost of borrowing.
How Do You Measure Inflation?
CONTENT
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• The main way economists measure
inflation is with the Consumer Price
Index (CPI).
• CPI compares the prices of a set
basket of goods between years.
Reduced
CONTENTPurchasing Power
AND PICTURE
• Prices increase for goods and services.
• Each unit of a currency buys less over
time.
• People cannot save as much money.
• More of their income gets spent to pay
for the same level of comfort as before.
Wage-Price
CONTENT
AND PICTURE
Spiral
• Typically begins with wage
increases demanded by workers.
• As wages increase, businesses
pass on the higher labour costs to
consumers.
• As prices rise, workers demand
even higher wages to maintain
their purchasing power.
Eroding
CONTENTInterest Rates
AND PICTURE
• You have 1,000 saved in a bank account, with an annual
interest rate of 2%.
• The inflation rate is 3%.
• Your 1,020 (initial amount plus interest) may have increased,
but the buying power is less than 1000 a year ago.
• Your saved 1K is now worth the buying power of 990 a year.
Promoting
CONTENT Growth
AND PICTURE
• Individuals and businesses choose
to invest and spend rather than
keeping money in low-yield
savings accounts.
• This increased spending and
investment can stimulate economic
activity and contribute to growth.
Hyperinflation
CONTENT
AND PICTURE
• Hyperinflation occurs when excessive amounts of
money are injected into the economy at a rate that
surpasses the pace it can be repaid.
Hyperinflation
CONTENT
in Zimbabwe
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● Zimbabwe's economic decline was
due to government policies and
poor economic management.
● Land seizures, excessive money
printing, and the prices of goods
and services skyrocketed daily.
● People struggled to afford
necessities and savings were lost. Economy collapsed, high unemployment,
● At its peak in 2008, the inflation social and political instability
rate was ~80 billion%/month!
DISINFLATI0N
• The decrease in the inflation rate over time.
• This happens when the Central Bank’s monetary
policy promotes employment, stable prices, and
moderate long-term interest rate.
Nota Bene: DISINFLATION ≠ DEFLATION
Deflation
CONTENT
AND PICTURE
• Deflation is the decrease in general prices of goods
and services over time, resulting in an increase in the
purchasing power of money.
• Deflation, or negative inflation, can have negative
effects on the economy by causing hoarding of cash and
reducing economic activity.
Inflation vs. Deflation
INFLATION DEFLATION
Definition: Definition:
The prices of goods and The prices of goods and
commodities increases commodities decreases
Explanation: Explanation:
Value of money decrease in the Value of money increases in the
internation market internation market
Effect: Effect:
Unequal distribution of income The unemployment level
increases
Stagnation
CONTENT
AND PICTURE
Stagnant Economic Growth + Inflation
• Economy is not GROWING while the prices is still
rising resulting to a significant decline in the
purchasing power of money.
DEPRESSION
• A severe and prolonged economic downturn characterized by a
significant decreased in the GDP and widespread
unemployment.
Discussion Questions
Why might deflation be bad for
the economy?
Discussion Questions
How does inflation impact the
buying power of consumers?
Provide examples.
Discussion Questions
How does inflation erode the value of
savings?
Explain the concept of real interest
rates.
Discussion Questions
How does inflation promote economic
growth?
Discuss the role of spending and
investment in the economy.
Discussion Questions
What are the potential consequences
of extreme cases of inflation, such as
hyperinflation?
Key Takeaways
• Inflation is the increase in the • Hyperinflation can cause economic
general prices of goods and collapse.
services. • Disinflation is the decrease in the
inflation rate overtime
• Inflation reduces the purchasing
power of money. • Deflation is the opposite of inflation
• Inflation is measured with the • Stagnation happens when economy
is not growing while prices rising.
Consumer Price Index (CPI).
• Depression is a severe and
• Inflation erodes interest rates and
prolonged economic downturn.
promotes economic growth.