Inflation vs Deflation

John Spacey, updated on August 07, 2023

Inflation is a sustained increase in the price of goods and services. Deflation is a sustained decrease in prices.

A small amount of inflation is generally considered good for an economy as it encourages consumers to spend and people to invest productively.

Deflation, even a small amount of deflation, is typically viewed negatively. When prices are always dropping, consumers have incentive to delay purchases resulting in less economic activity. This can cause businesses to close and the unemployment rate to go up. A high unemployment rate means that employees can't demand a high salary because jobs are scarce. This tends to reduce prices further in a downward spiral.

Another negative impact of deflation is that it discourages investors from taking risk. When cash is increasing in value you can make money by doing nothing with your savings. This discourages people from starting businesses and employing people.

Economists tend to recommend a low inflation rate as a target because it keeps people spending and people investing their money into productive ventures. A high inflation rate can be just as damaging as deflation, in some cases it is far worse.

Inflation vs Deflation
	Inflation	Deflation
Definition	A sustained increase in the price of goods and services.	A sustained decrease in the price of goods and services.
Impact	A low inflation rate may be conductive to economic growth. A high inflation rate and hyperinflation have negative impacts.	Generally viewed negatively as it discourages productive investment and spending.