Why Deflation Is Bad?

Follow us on LinkedIn Most economies experience inflation regularly. Inflation represents a specific currency’s purchasing power. A high increase in inflation can result in damage to most economies. Some economies may also experience negative inflation, also known as deflation. While, theoretically, it can be a good thing, it also has some drawbacks.

What is Deflation?

Deflation is an increase in the currency’s purchasing power. Or it refers to the decline in the prices of goods and services. There are several reasons why deflation may occur in an economy. Usually, it relates to supply and demand. When the money or credit supply in an economy decreases, or productivity and the number of goods and services increases, it results in deflation.

How does Deflation work?

Same as inflation, the Consumer Price Index helps calculate the deflation in an economy. However, there are some factors that the index ignores, which can have an impact on it. Therefore, the index may not be a true indicator of inflation or deflation in an economy. When the index in one period for an economy is lower than the previous, inflation is said to have occurred. Deflation usually comes with a negative signal for an economy. It results in a decrease in the money supply in a country due to lower wages, hurts investment portfolios, and even causes unemployment. Therefore, deflation may also accompany a recession in the future. As the deflation in a country increases, the chances of a recession occurring in the future also increase. However, that does not mean deflation can only result in adverse effects. Deflation can also result in increased nominal consumer spending. Since deflation causes an increase in purchasing power of a currency, it means more people can afford items. With the increased spending by consumers, deflation can positively stimulate the economy.

Why is Deflation bad?

Despite its positive effects, deflation is usually bad for the economy. Although deflation can stimulate the economy with increased consumer spending, there is no guarantee that will happen. As the prices of goods and services start declining, consumers will postpone their spending. Usually, this is because they hope the prices will decrease even further in the future. Therefore, deflation slows a country’s economic growth. Due to the decreased spending by customers, manufacturers are forced to reduce their prices. For most consumers, it provides a choice between various products at affordable prices. However, it causes manufacturers to employ cost-cutting measures. Some manufacturers may also suffer significantly and go out of business. Either way, deflation can cause unemployment in an economy aside from its other adverse impacts. Similarly, it decreases a country’s GDP, which can even further magnify the problem. Apart from manufacturers and consumers, deflation can also affect borrowers. They have to repay lenders a higher amount due to the increase in the currency’s purchasing power. Overall, deflation can cause a chain of events that can lead to a severe economic decline. Long periods of continuous deflation can even force economies to go into recession.

Conclusion

Deflation refers to the increase of a currency’s purchasing power. While deflation can have a good effect on an economy, in some cases, it can also impact a country adversely. Deflation can cause a decline in consumer spending as they postpone it, hoping to get lower prices in the future. It can result in lower earnings for manufacturers and can further result in other problems.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory
LATEST NEWSAn Eerie Market Calm, Crypto in Brooklyn: Sunday US Briefing
An Eerie Market Calm, Crypto in Brooklyn: Sunday US Briefing

Something for your week.

Stay up-to-date with the latest news - click here
LATEST NEWS6 Questions New Donors Should Ask Themselves About Charitable Giving
6 Questions New Donors Should Ask Themselves About Charitable Giving

Among other things, take advantage of matching-donation opportunities and give directly to nonprofits.

Stay up-to-date with the latest news - click here
LATEST NEWSUN secretary-general lambasts COP28 presidency’s net zero charter
UN secretary-general lambasts COP28 presidency’s net zero charter

Plans launched by summit president Sultan al-Jaber ‘clearly fall short of what is required’, says António Guterres

Stay up-to-date with the latest news - click here
LATEST NEWSIslamic State claims responsibility for deadly Philippine bombing
Islamic State claims responsibility for deadly Philippine bombing
Stay up-to-date with the latest news - click here
LATEST NEWSCOP28 a rare chance in UAE for protests on Palestinians, climate action
COP28 a rare chance in UAE for protests on Palestinians, climate action
Stay up-to-date with the latest news - click here

No questions found.




Ask a Question

Attach YouTube/Vimeo clip putting the URL in brackets: [https://youtu.be/Zkdf3kaso]


Tags:

Leave a Reply