Let us try to understand about what is deflation. How to Control Deflation. What are the causes of deflation? Thomas J. Stanley asserts that you need to develop millionaire thinking skills before you can become one. You must learn to inspire yourself to overcome fear with bravery. Before we go in, please subscribe to our channel and do press on the Bell icon to get the notifications.
What is deflation & how to control Deflation? It is a decline or decrease in the prices of goods or services. In simple terms, it occurs when the prices of goods or services fall. It is the opposite of inflation. Price increases for goods and services are known as inflation.
Describe Deflation and Inflation and Control of Deflation and Inflation
Inflation reduces the value of currency over time, but certain deflation increases it. It gives the consumer more purchasing or buying power, as the money they have now can buy more than it previously could with the same amount of currency. That is, it raises the purchasing power of the currency. When inflation rises, the value of the currency goes down and the consumer cannot buy as much as they previously could.
This inflation is different from deflation. This inflation occurs when the inflation declines to a lower rate but is still positive. It occurs due to two major causes. They are an increase in supply a decrease in demand. It often signals an impending recession.
With a recession comes the declining of wages, job losses and big hits to most investment portfolios. As the recession worsens, so does the deflation. As already discussed, it increases the purchasing power of the currency. While this may seem like a great thing for the shoppers and the consumers, the actual cost of the widespread deflation is the longterm drop in demand. It expectations make consumers or buyers to wait for the drop of prices or lower prices.
Know About Deflation & Inflation CPI
This reduces the demand and slows the growth. It is worse than inflation because the interest rates can be only be lowered to zero. How is deflation measured? Deflation is measured using economic indicators like Consumer Price Index, that is, CPI. The CPI tracks the prices of a group of commonly purchased goods and services and gives us the changes every month.
When the prices measured in aggregate by the CPI or lower in one period than they were in the period before, it means that the economy is experiencing deflation. Conversely, when the prices collectively rise, it means that the economy is experiencing inflation. Now, let’s look into the causes of deflation. As mentioned earlier, there are two causes of deflation. One being decrease in demand and the other is growth in supply.
Each cause is tied back to the fundamental economical relationship between supply and demand. A decline or fall in aggregate demand leads to a fall in the price of goods and services. If the supply does not change, a fall in the aggregate demand may be triggered by monetary policy. Raising the interest rates may lead people to save their money or cash instead of spending it, which discourages borrowing. And spending less, in turn, leads to less demand for goods and services.
Reason of Declining
Declining Confidence adverse economic events such as the present situation or a global pandemic may lead to a decrease in overall demand. People may save more and spend less if they are concerned about the economy or unemployment.The other reason is increase in supply. Higher aggregate supply means that the producers may have to lower their prices due to increased competition. The increase or boost in the aggregate supply may raise from the drop in production costs.
If it costs less to produce goods, companies can make more at the same price. Prices may decline as a result of greater supply than demand. Now, let’s look into the consequences of deflation. Frequently, deflation occurs during recessions. Deflation can cause increase in unemployment.
During deflation, the unemployment rate will rise. Since the price levels are decreasing, producers tend to cut their costs by laying off their employees, which leads to the increase in unemployment. The real cost of borrowing increases. The real worth of debt rises as a result of rising interest rates, which are also linked to deflation. As a result, consumers are likely to decrease their spending.
Holding back on Spending customers may postpone demand if they expect prices to fall in the future. Savings and confidence are impacted by asset price declines, such as the price deflation in the property market. Income Distribution deflation leads to redistribution of income from debtors to creditors. In a condition known as a “deflation spiral,” falling prices set off a series of events that reduce demand, production, wages, and price levels even further during a recession. Deflation spiral is a problem for the economy since it makes things much worse.
How to control Deflation?
Now, how to control deflation? Number One currency expansion. Deflation controlled through currency expansion. To expand the nation’s currency supply, the central bank can print fresh notes. The economy receives a new injection of funds, individuals earn more money, spend more, and demand rises..
Number Two credit Expansion the central bank can ask the commercial banks to expand the volume of credit in the country. The rate of interest is decreased, commercial activity increases, and the deflationary phase is over.. Number three foreign trade policy to increase exports and reduce imports. No. Four regulation of production to avoid the problem of overproduction. Number five consumer credit.
The loans must be provided to consumers for the purchase of household assets. To help the debtors, the number of instalments can be raised. Tax number six lowering the tax rate could result in an increase in personal income. Spending the money you save on goods and services is an option. Seven public works make it possible to build highways, dams, bridges, schools, and power projects..
The amount is shift from government to general public. The income of people goes up. The demand for goods increases and there is improvement in production. Number eight. New investment.
The investment used to set up new factories and mills. The money is shift from idle hands to protective hands. The flow of money from idle hands to protective hands raises the level of growth.