Contents

•Inflation- Meaning
•Types of inflation
•Cause of inflation
•Deflation- Meaning
•Types of deflation
•Cause of deflation
•Effects of deflation
•Conclusion
 Inflation-Meaning

•Inflation - The steady increase in general price level.

•“Too much of Money chasing too few goods” – Coulbourn

Example of inflation
Types of
inflation
Creeping  -Slow moving & very mild

Walking -Moderately rate of Price increases

Running
-Significant rate of Price increases

Galloping 
-Rapid rate of price increases
When demand is high & supply is Sudden shortfall of supply leads to a
low, the price of the goods surge in the cost of production, which
increases. increases the rate of Inflation.

Eg: When movie is house full, the Eg: soap and shampoo prices may rise
demand for the price of the ticket if the chemicals used in making these
increases. become costlier
The Cause of Inflation

• Increase in money supply

• Increase in disposable income
• Increase in consumer spending
• Cheap money policy
• Deficit financing
• Cut in tax rates
 Deflation - Meaning

•Deflation is a decrease in the general price level of goods and services.

•It is negative inflation. When it occurs, the value of currency grows over time.
Thus, more goods and services can be purchased for the same amount of money.
 Types of deflation
Generally deflation can be categorized into 2 types:
1) lower costs of production 2) deflation by fall in demand
Deflation caused by lower costs ‘good deflation’
If we have ‘good’ deflation – due to a big increase in productivity, lower costs –
then in theory firms will be able to pay real wage increases. With this type of
deflation, we are seeing lower prices, but also higher output, higher productivity,
higher profits – and hopefully higher real wages. If consumers see lower prices,
but they have rising real incomes, then you would expect higher spending because
they will have the money to buy these cheaper goods. But this is a very rare
scenario .

Deflation caused by a fall in Aggerate Demand .

If we have ‘bad’ deflation – falling prices caused by weak demand, then firms will
be seeing a decline in profitability. In this circumstance, firms will not be
increasing wages but trying to cut wages. Also, if firms can’t cut nominal wages,
we may see a rise in unemployment .
Therefore, in this scenario of lower wages / higher unemployment, the falling
prices will not be sufficient to encourage spending and higher consumption.
Instead, people will be risk-averse trying to save and waiting for prices to fall
further.
The Cause of deflation
Fall in Aggregate Increase in
Demand Aggregate Supply

Fall in the money Lower

supply production costs

Decline in Technological
confidence advances
 Effects of deflation

Wage Cutbacks & Layoffs Reduced Business Revenues

 Changes in Customer Spending

 CONCLUSION

Most of the world's central banks target

modest levels of inflation, at around 2%–
3% per year. Inflation in smaller degree
can be good for the economy. On the
contrary Deflation can lead to an
economic recession or depression, and
the central banks usually work to stop
deflation as soon as it starts.