Introduction to economics

of inflation and deflation

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Inflation
- Inflation is the sustained upward movement in
the overall price level of goods and services in an
economy.
- Reduces purchasing power
- Causes steadily rising prices
- Reduces the value of money
Deflation
-Deflation is when consumer and asset prices decrease
over time, and purchasing power increases. Essentially,
you can buy more goods or services tomorrow with the
same amount of money you have today. This is the mirror
image of inflation, which is the gradual increase in prices
across the economy.
- Causes steadily failing prices
- Usually occurs when demand falls
- Increases the value of money
Hyperinflation
Hyperinflation is a term to describe rapid,
excessive, and out-of-control general price
increases in an economy.
Causes of hyperinflation
1. An increase in money supply not supported by
economic growth, which increases inflation.
2. A demand-pull inflation, in which demand outstrips
supply.
Disinflation
Disinflation is a temporary slowing of the pace of
price inflation and is used to describe instances
when the inflation rate has reduced marginally
over the short term. Unlike inflation and deflation,
which refer to the direction of prices, disinflation
refers to the rate of change in the rate of inflation.
Inflation expectations

Inflation expectations describes what people

and businesses expect to happen to consumer
prices in the future (usually one year ahead).
Once a higher rate of inflation becomes
established it can be difficult to remove. If
people expect higher prices, this can then feed
through to higher wage claims and rising costs.
The wage/price spiral

The price/wage spiral is a theoretical concept that

represents a circle process in which wage
increases cause price increases which in turn
cause wage increases, possibly with no answer to
which came first.
High inflation creates upward pressure on
wages as workers seek to gain an increase in
wages to meet the rising prices and maintain
living standards.
Stagflation

Stagflation is the extreme economic situation, a peculiar

combination of stagnant growth and rising inflation
leading to high unemployment. Generally, rising inflation
is a sign of a fast-growing economy as people have
more money to spend higher amounts on the same
quality of goods.
 Main causes of inflation
1. Demand-pull inflation
Demand-pull inflation happens when the demand for certain goods
and services is greater than the economy's ability to meet those
demands. When this demand outpaces supply, there's an upward
pressure on prices — causing inflation.
2. Cost-push inflation
Cost-push inflation is the increase of prices when the cost of wages
and materials goes up. These costs are often passed down to
consumers in the form of higher prices for those goods and
services.
3. Increased money supply
Increased money supply is defined as the total amount of money
in circulation, which includes cash, coins, and balances and bank
accounts according to the federal reserve if the money supply
increases faster than the rate of production, this could result in
inflation, particularly demand-pull inflation because there will be
too many dollars chasing too few products. An increase in money
supply is usually created by the Federal Reserve through a
process called Open Market Operations (OMO).
4. Devaluation
Devaluation is downward adjustment in a country's exchange rate,
resulting in lower values for a country's currency.

The devaluation of a currency makes a country's exports less

expensive, encouraging foreign nations to buy more of the
devalued goods. Devaluation also makes foreign products for the
devaluing country more expensive which encourages citizens of
the devaluing country to buy domestic products over foreign
imports
5. Rising wages
Rising wages is exactly what it sounds like — an increase
in what's being paid to workers. "Wages are a cost of
production," adds Baker. "If wages rise a large amount,
businesses will either have to pass the cost on, or live with
lower margins. The exception is if they can offset wage
growth with higher productivity."
6. Policies and regulations
Certain policies can also result in either a cost-push or
demand-pull inflation. When the government issues tax
subsidies for certain products, it can increase demand. If that
demand is higher than supply, costs could rise. Additionally,
stringent building regulations and even rent stabilization
policies could inadvertently increase costs and create an
inflationary environment by passing those costs to residents or
artificially reduce the supply of housing.
The financial takeaway
Inflation, generally around 2% per year, is a normal part of
our economic system. Under normal financial
circumstances, this means that your money is worth less
each year, unless it is gaining an interest rate greater than
or equal to inflation. To ensure that your money is keeping
pace with inflation, consider annual salary increases or cost
of living adjustments by your employer.
Demand-Pull Inflation

Demand-pull inflation is a type of

inflation that is influenced by growing demand for a good or service.
When the aggregate demand -- or the total demand in a market -- is
higher than the aggregate supply -- or the total supply in a market --
prices will rise. It is commonly described as "too much money
chasing too few goods."

Demand-pull inflation is a specific phenomenon, and it typically

refers to an effect not just impacting individual goods and services
or markets, but entire economies.
Thank you
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