Inflation & Deflation

Introduction:

The word “Inflation” comes from the verb “inflate” which means to cause to expand or distend with air or gas. In economics it meansto expand (money, prices, an economy, etc.) unduly in amount, value, or size. In brief we can say that it indicates to increase, especially suddenly and substantially. Suppose, we often say that a $10 subscription has inflated to $25.

Definition:

In economics, Inflation is one of the most widely used terms in all its levels. Though it has multifarious meanings, in general, Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase.

If we say that inflation is 7%, we mean that the currency has lost its real value by 7% i.e., the purchasing power is declined by 7%. Literally, it is the meaning of inflation. But the term is not so easy to define or to explain. So, we are in need of discussing it more elaborately.

Types of Inflation:

The mirror term of inflation is disinflation which is widely known as deflation. It is the falling of the general level of price just opposite of the inflation. It happened when the great deflation of 1930s in the USA happened and US economy was near about collapse.

Hyperinflation is a type of inflation where rapid inflation is occurred.It happened when the great deflation of 1923 in Germany happened where price rose 2,500% in one month.

Stagflation is another type of inflation when a combination of high unemployment and economic stagnation is happened simultaneously. It happened during 1970 when OPEC countries raised oil prices and industrialized countries fell in deep crises.

Why inflation happened.

The far and wide cause of inflation may be described through two theories. The first is Demand-Pull inflation and the second is Cost-Push inflation.

Demand-Pull inflation: When too much money chase too few goods i.e., the demand is growing too faster than the supply then the price will rise automatically and inflation occurs. It happens in especially in growing economy.

Cost-Push inflation: When the production and marketing cost of the company increases then the price level is increased due to maintain profit margin. When scarcity of raw materials is taken place as well as taxes and wages are increased then it may happen to any market.

Aftermath of inflation:

Inflation may be of two types according to its effect on the market. It may be Anticipated or Unanticipated.

When anticipated inflation is occurred then it creates no problem and it can be compensated. Actually, a certain degree of inflation is quite necessary in order to maintain the growth of the economy. So, people is ready to accept it in a positive manner.

Disaster happens when unanticipated inflation occurs. The effects are wide and they include many things. The creditors lose and debtors gain if the lender fails to anticipate inflation. Uncertainty or lack of future forecast often makes customer less likely to spend and it hampers the smooth operation as well growth of the economy and the market. Some special segment of our population like the retirees who lived on their fixed income generated from the profit of their deposit can experience great shock which can also affect their style of living. The price labels of entire economy required to be changed and the domestic product may be lost its competitiveness in price.

Is inflation positive:

In 1892, the Populist Party of the USA which is formed by the farmers, wanted inflation due to fulfill their reasons. They wanted inflation at the time of their repayment of the debt as they can took the benefit of the price of their products. It is reality which lies in the decision when someone wants to take the benefit from the market. But it a periodic decision. In general, inflation is a ongoing process in any market. For a developing economy its rate is higher than for a developed economy. In Bangladesh, it was about 10% in the recent past years which is higher in degree and harmful for the economy. But at present Government has succeeded to make it down and control it at a certain degree such as 6.2% target is fixed for FY16. The desired rate of inflation is considered for an economy is 2-4%.

Ways to inflate currency:

There are three ways to inflate currency. The first is to keep up the growth of productivity as well as to increase the demand which ultimately increase the price level. It always has a good effect on the economy and this is an expected situation. It is called a healthy state for the economy.

The other two types of inflation is considered as harmful and artificial for economy. They are the printing of currency by the government and circulate it in the market and the stimulus borrowing i.e., borrowing from banks and private investors. Both the method has bad effects on the economy. It decreases the value of the currency over nightly and reduces the capacity of the repayment of debt.

In this regard, we can say thatto place a moratorium on taxes or a cut on taxes may be more stimulus other than any steps. So, using this type of initiatives may be useful for a certain period of time but it has a long term effect on the economy.

Methods of measuring Inflation:

There are many measures of measuring inflation which are used worldwide. Among them, Consumer Price Index (CPI)is the widely used method in the USA. The CPI measure considers the retail price of a huge number of specific goods and determine the percentage of inflation on a monthly basis. A CPI of 115 means that prices are 15% higher than they were in the base period. There are different types of CPI measures which varies due to its differentiation in the method of calculation such as an Index for urban people as well as local.

 

Deflation:

The gross meaning of deflation is to decrease the general price level of the goods and services. It is the vice-versa process of inflation. In deflation the market has been shrink and the economy faces great disasters.

Effect of Deflation:

The direct effect of deflation is that it decreases the income but the debt remains the same. It reduces the capacity of repayment of the debt for a single person as well as the country in a greater aspect. So, in any way, we can consider it as an evil for the economy.

The other effect of the deflation is so painful that it can be described as “ a world without inflation would be as brutal and unforgiving as the atmosphere of Venus.” So, we can guess that the situation of deflation is not an expected one at all for any economy.

Conclusion:

Though the issue is a elaborated one, but from our brief discussion it is crystal clear that deflation is unexpected for any economy because no one want to do any job without any reward, So, we can firmly say that it is bad for any economy.

On the other hand Inflation is good and expected but when it is controlled within a certain limit. Unexpected and greater degree of inflation can collapse any economy at any time.