📈 Inflation
✅ Definition:
Inflation is the general increase in prices of goods and services over a period of time. It means that each unit of currency buys fewer goods and services, reducing the purchasing power of money.
🔍 Example:
If a loaf of bread costs $1 this year and $1.10 next year, inflation has occurred — the same money now buys less than before.
📊 Main Causes of Inflation:
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Demand-pull inflation: Occurs when demand exceeds supply.
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Cost-push inflation: Caused by rising production costs (e.g., wages, raw materials).
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Built-in inflation: Due to adaptive expectations — wages and prices rise together.
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Monetary inflation: An increase in the money supply faster than economic growth.
📉 Negative Effects:
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Decreased purchasing power
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Increased cost of living
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Uncertainty in investments
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Can erode savings
👍 Possible Benefits (moderate inflation):
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Encourages spending and investment
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Reduces real value of debt
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Helps labor market flexibility
📉 Deflation
✅ Definition:
Deflation is the general decrease in prices of goods and services across an economy. It increases the purchasing power of money but can signal economic problems.
🔍 Example:
If a car costs $20,000 this year and $18,000 next year, deflation has occurred — money has gained value relative to goods.
📊 Main Causes of Deflation:
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Falling demand: Consumers delay purchases, expecting lower prices.
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Excess supply: Overproduction leads to price drops.
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Monetary tightening: Reduced money supply or high interest rates.
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Debt deleveraging: Businesses or consumers reduce debt instead of spending.
📉 Negative Effects:
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Reduced business revenues
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Lower wages
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Rising unemployment
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Increased debt burden in real terms
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Prolonged economic stagnation
⚖️ Comparison: Inflation vs. Deflation
| Indicator | Inflation | Deflation |
|---|---|---|
| Price direction | Prices rise | Prices fall |
| Currency value | Decreases | Increases |
| Consumer behavior | Spend now (to avoid higher prices) | Delay spending |
| Economic impact | Can stimulate moderate growth | Often linked to recession |
| Risk | Hyperinflation | Deflationary spiral |
🧠 Conclusion
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Inflation and deflation are both indicators of economic shifts.
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Controlled inflation is considered healthy for growing economies.
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Deflation, while it may seem good for consumers, often signals deeper economic issues like low demand, low investment, and high unemployment.