Inflation vs. Deflation: What’s the Difference?

The main difference between Inflation and deflation is that inflation erodes the value of money over time, reducing the purchasing power of money whereas deflation increases the value of money, increasing the purchasing power of money.

Before we move to more differences, let’s first understand Inflation and Deflation:

  • Inflation: Inflation is a general increase in the prices of goods and services over time, resulting in a decline in the purchasing power of money.
  • Deflation: Deflation refers to a sustained decrease in the overall price level, leading to an increase in the purchasing power of money.

Now, let’s get to Inflation vs Deflation:

Major differences between Inflation and Deflation

Inflation Deflation
Inflation erodes the purchasing power of money, reducing the value of savings and incomes over time. Deflation increases the purchasing power of money, allowing individuals to buy more with the same amount of money.
Inflation is often associated with periods of economic growth and expansion, as increased spending and investment drive prices higher. Deflation is typically a sign of economic contraction and reduced economic activity.
Inflation is influenced by factors such as demand, production costs, monetary policies, and supply shocks. Deflation can occur due to decreased demand, excess supply, or contractionary monetary policies.
Inflation can have redistributive effects, benefiting borrowers and those with assets that appreciate in value. Deflation can harm borrowers, increase the burden of debt, and negatively impact businesses and employment.
Inflation is characterized by a general increase in prices. Deflation is characterized by a general decrease in prices.

So, these are the main differences between the entities.

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