Deflation is an economic- related term that contrasts with the inflation concept. It consists of a process of constant fall in the price index within the set of goods and services. This means that it is not a series of products that lower the price, but a general trend in relation to the price index. In other words, negative inflation occurs when there is a cyclical decrease, while deflation is a profound and continuous phenomenon over time. Deflation
Why does this phenomenon happen and how can it be measured?
The main tail of deflation is the advance of the technological process, a circumstance that can lead to a reduction in the prices of goods and services. To measure deflation a series of economic parameters is used, more particularly the CPI or Consumer Price Index. On the other hand, to measure deflation a comparison of 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 the population of a country as a whole. However, in reality , deflation is dangerous for the economy. Thus, a deflationary line involves a series of consequences: Deflation
1) When there is an oversupply, this translates into an increase in the stock in the companies’ warehouses, thus, to reduce these stocks, prices are lowered and the profit margin of the products is reduced.
2) The previous paragraph establishes a reduction in production and this implies a reduction in the workforce.
3) As a consequence of paragraphs 1 and 2 there is an increase in unemployment rates, therefore there is a reduction in the disposable income of wage earners.
These three consequences, in turn, have other negative repercussions, such as the decrease in demand, both in consumption and in investment by companies, thus they find themselves in the dilemma between reducing production and not investing. Deflation
A trend in the economy towards deflation could end in a collapse of economic activity as a whole.
Economic experts warn that, on the other hand, deflation does not encourage consumption, as consumers stop consuming, waiting for products or services to continue falling in the future.
Inflation is also negative for the economy
Inflation is an increase in the prices of goods and services, something that affects consumers, since disposable income is not enough to cover basic needs. In this way, the most logical thing for an economy is that there is low inflation and that it is controlled by the intervention of the central bank. Deflation