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In economics , deflation is a decrease in the general price
level of goods and services. [1] Deflation occurs when the annual
inflation rate falls below 0% (a negative inflation rate ).
Thisshould not be confused with disinflation , a slow-down in the
inflation rate (i.e. when inflationdeclines to lower levels). [2]
Inflation reduces the real value of money over time;
conversely,deflation increases the real value of money the currency
of a national or regional economy.
This allows one to buy more goods with the same amount of money
over time.
Disinflation is a decrease in the rate of inflation a slowdown
in the rate of increase of thegeneral price level of goods and
services in a nation's gross domestic product over time. It is
theopposite of reflation .
If the inflation rate is not very high to start with,
disinflation can lead to deflation decreases inthe general price
level of goods and services. For example if the annual inflation
rate one monthis 5% and it is 4% the following month, prices
disinflated by 1% but are still increasing at a 4%annual rate. If
the current rate is 1% and it is the -2% the following month,
prices disinflated by3% and are decreasing at a 2% annual rate.
In economics , hyperinflation is inflation that is very high or
"out of control". While the realvalues of the specific economic
items generally stay the same in terms of relatively stable
foreigncurrencies, in hyperinflationary conditions the general
price level within a specific economyincreases rapidly as the
functional or internal currency , as opposed to a foreign currency,
loses itsreal value very quickly, normally at an accelerating rate
As a rule of thumb , normal monthly andannual low inflation and
deflation are reported per month, while under hyperinflation the
general
price level could rise by 5 or 10% or even much more every
day.
A vicious circle is created in which more and more inflation is
created with each iteration of theever increasing money printing
cycle.
Hyperinflation becomes visible when there is an unchecked
increase in the money supply (seehyperinflation in Zimbabwe)
usually accompanied by a widespread unwillingness on the part of
the local population to hold the hyperinflationary money for more
than the time needed to trade itfor something non-monetary to avoid
further loss of real value. Hyperinflation is often associatedwith
wars (or their aftermath), currency meltdowns like in Zimbabwe ,
and political or socialupheavals.
, stagflation is the situation when both the inflation rate and
the unemployment rate are high. Itis a difficult economic condition
for a country, because when inflation and economic stagnation are
occurring simultaneously, a policy dilemma results since actions
that are meant to assist with
fighting inflation might worsen economic stagnation and vice
versa.The concept is notable partly because, in postwar
macroeconomic theory, inflation andrecession were regarded as
mutually exclusive, and also because stagflation has generally
proven to be difficult and, in human terms as well as budget
deficits, very costly to eradicateonce it starts.
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R eflation is the act of stimulating the economy by increasing
the money supply or by reducingtaxes . It is the opposite of
disinflation . It can refer to an economic policy whereby
agovernment uses fiscal or monetary stimulus in order to expand a
country's output . Thiscan possibly be achieved by methods that
include reducing tax, changing the money supply, or even adjusting
interest rates . Just as disinflation is considered an acceptable
antidote to high
inflation, reflation is considered to be an antidote to
deflation (which, unlike inflation, isconsidered bad regardless how
high it is).
Originally it was used to describe a recovery of price to a
previous desirable level after a fallcaused by a recession. Today
it also (in addition to the above) describes the first phase in
therecovery of an economy which is beginning to experience
increasing prices at the end of aslump. With rising prices,
employment, output and income also increase till the economy
reachesthe level of full employment .
Inflation Theories - Demand-Pull Inflation - Demanding
inflation
One of the principal causes of inflation is excessive demand -
'too much money chasing too fewgoods' . If demand is growing faster
than the level of supply, then prices will increase. Output will
increaseas well, as there is a shift along the aggregate supply
curve, but because supply cannot keep up withdemand prices go up as
well. This is shown in the diagram below:
Demand-pull inflation will therefore usually occur along with a
booming economy. To avoid demand-pullinflation you need to try to
keep the economy growing at a steady, but not excessive rate - a
tall order!
Inflation Theories - Cost-Push Inflation - What pushes inflation
up?
Cost-push inflation happens when firms' costs go up. To maintain
their profit margins, firms then need toput their prices up. In
other words cost increases have pushed inflation up. Cost-push
inflation may arisefrom various sources:
y Wage increases - wages are a major proportion of costs for
many firms and so if wages areincreasing, this may well cause
cost-push inflation.
y G overnment - if the government changes taxes, this may push
up firms' costs. This is particularlytrue with excise duties on
fuel and oil. Changes in interest rates can also affect firms costs
if theyhave borrowed significant amounts.
y Ab road - exchange rate changes can affect firms' costs,
particularly if they import many of their raw materials. An
exchange rate depreciation will increase import prices and may
thereforeincrease firms costs.
