Deflation vs Inflation: What’s the Difference

Deflation vs Inflation: What’s the Difference

( – Inflation has dominated the headlines for nearly two years, as it soared so high it shattered a 40-year record. What about deflation? Is that as problematic as rising prices? Let’s explore the difference between the two and find out.

An “up versus down” explanation would be the simplest way to define the two economic issues. But, as with most things relating to finance, it’s always more complicated than it seems.

Inflation is never good for consumers. It essentially means they pay more for the same product without an adjustment in pay to compensate. The value of every dollar goes down, and already struggling families find themselves stretching their budgets to the limit.

On the flip side, some inflation is good for investors with tangible assets. They may see a rise in the value of their property, an increase in their net worth, and higher creditworthiness.

On the other hand, deflation is typically a positive economic indicator. When prices drop, buying power increases. So, the same amount of money from this period’s paycheck goes further than it did last time. Slow and steady drops during times of prosperity also bolster the value of a currency, making saving more appealing.

As with inflation, there’s a dark side. When prices drop too fast, assets tend to devalue just as quickly. That was the case when during the Great Recession. For years, banks offered easy, subprime mortgages to just about anyone who could afford a down payment, leading to a bubble in the housing market. When it inevitably burst, the resulting deflation devastated the American working and middle class.

The key to inflation and deflation is balance. A strong economy with natural ebbs and flows and a solid investment base is always the most desirable.

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