Economy »Deflation

What is deflation

Deflation is a term related to the economy and that opposes the concept of inflation . It consists of a process of constant decline in the general level of prices in the set of goods and services. This implies that it is not a series of products that decrease their price but rather a general trend in terms of price level. In other words, negative inflation occurs when there is a temporary decrease, while deflation is a deeper and more continuous phenomenon over time.

Why does this phenomenon occur and how is it measured?

The main cause of deflation is the advance of technological progress, a circumstance that can cause a reduction in the prices of services and goods. A series of economic parameters are used to measure deflation, particularly the CPI or consumer price index. On the other hand, when comparing deflation, a comparison with prices with other periods of time is used.

The main consequences

Apparently a reduction in price levels can be interpreted as a positive issue for a country's population as a whole. However, deflation is really dangerous for the economy. Thus, a deflationary spiral implies a series of consequences:

1) an excessive supply is produced and this translates into an increase in the stock of the stores of the companies and to reduce the stocks the prices are lowered and this reduces the profit margins of the products,

2) the previous section implies a reduction in production and this ends up implying a reduction in the number of workers and

3) as a consequence of sections 1 and 2 there is an increase in unemployment rates and, therefore, there is a reduction in the disposable income of employees. These three consequences have, in turn, other negative repercussions, such as the decrease in demand for both consumption and investment by companies, as they are immersed in reducing production and not in investment.

A trend in the economy towards deflation can end in a collapse of economic activity as a whole

Economics experts remember, on the other hand, that deflation does not stimulate consumption, since the consumer stops consuming while waiting for products or services to continue to decline in the future.

Inflation is also negative for the economy

Inflation is an increase in prices of goods and services, something that severely affects consumers, since disposable income is not enough to cover basic needs. In this way, the most reasonable thing for an economy is that there is low inflation and that it is contracted by the intervention of central banks.

Photos: iStock - yuriz / MagMos

Author: Javier Navarro | Site: - definition | Date: April 2016 | URL: /economia/deflacion.php
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