Most of us know the basics of inflation and deflation. It is pretty straight forward inflation is when prices increase on things and deflation is when the prices decrease on things. Yes, both can occur simultaneously as well. If either one hits an extreme level it is not good for a better economy. Both bad for the economy for separate reasons. Which is why the Fed Reserve and the central bank try to keep that from happening. There are ways to recognize both when they are going haywire, keep track to protect yourself.
Deflation and Inflation Differences
When it comes to inflation there are five different types. The first type is the worst type, it is referred to as hyperinflation. That is when prices of things increase more than half in cost in a month or less. It is rare, but it is on the list because it can happen. On the lowest end of the spectrum, you will find asset inflation. Which is the one that happens quite frequently? Such as gas prices going up and down, usually due to traders bidding up oil prices.
Then you have the 3rd type which is referred to as the creeping inflation. It is the one that sneaks up on you with a 3% increase during a year or sooner. This one usually pops into the picture right around the time the economy seems to be doing good. The 4th one is known as a walking or a pernicious inflation. With this one, prices will increase by 3 to 10% within a year. This is the one that usually makes people want to keep an ample supply of things.
The 5th kind is referred to as galloping, it is when prices increase by 10% or more within a year or longer. It is enough of an increase to make the economy unstable. It will also chase out foreign investors and destroy government leaders.
Deflation simply means the prices on things start to fall, it is harder to detect because they don’t all tend to fall all at the same time. Sometimes deflation will only happen in one area, but not another. The Fed Reserve watches out for and removes any price changes that are considered volatile. Which are the ones that could cause serious problems?
What Causes Inflation
There are several main reasons for inflation. There is demand-pull, which happens when demand outruns the supply. Then there is cost-push inflation, meaning the supply of goods or services is tightened down but the demand for them doesn’t change. The last is over-expansion of the nations money supply, which happens when the overabundance of capital chases too few goods and services.
When deflation happens, it is caused by a lowering of demand. Which can also cause a bidding battle, since it means there are fewer shoppers.
How Deflation and Inflation Are Controlled
So obviously there has to be some kind of control of deflation and inflation. Otherwise, the economy would be more of a wreck than it already is. So how are is this taken care of? The Federal Reserve uses something called the core PCE price index to measure inflation. If it goes above their 2% target, the central bank will then utilize the contractionary monetary policy. Which in turn will raise interest rates, lowering money supply slowing the demand inflation?
General inflation is what the Federal Reserve handles. The contractionary monetary policy will then go after asset inflation.
Which Is Worse Deflation or Inflation?
Most would think inflation is worse, but actually, deflation is. It is worse since the interest rates can only be lowered to 0%. When people are spending less is reduces demand. Prices will start to fall, in turn, companies are earning less profit. When people are thinking prices are getting ready to drop, they will delay buying things for as long as they can. Since most know if you wait longer lower it will go. It can create a horrible end result.
What Does Either Have to Do with You?
On the upside, inflation will lower your standard of living if your income can’t keep up with increasing prices. If inflation stays around the 2% area, hence people will tend to buy before things rise in price. Which is great for economic growth.
Now that we have covered the bases on what is deflation and inflation. As well as some of the things that can happen. What can you do to guard yourself? They currently are under control, but if you still want to know where they are at you can find what you are looking for in the monthly Consumer Price Index report.
If you think you want to go a step further, look into Series I bonds and Treasury Inflated Protected Securities. They are both great bands worth investing in if you have the extra money to do so. Want to know more about them you can find out about them online as well.
Finally, for more information about how you can put your money to good use as investments, feel free to contact us now! Our customer service team can give you excellent advice when it comes to financial planning. Drop us a call now! OR you can read through our website for all our moneylender reviews. We are here to provide you with more information.