Deconstructing Inflation And Deflation

Inflation and Deflation are both components related to the downfall of the nation’s economy. Inflation occurs due to the rise in the prices of services and goods, whereas deflation occurs due to the decline in the prices of services and goods. It is difficult to maintain a proper balance in both, and the extreme of any one of these can lead to economic issues. Deflation and inflation can be experienced in different sectors of the economy of the nation, and the government keeps refreshing the rates of the products in the market to balance the two sides.

Let us find out the factors which contribute to the inflation and deflation of an economy.

Inflation

It is a quantitative measure of the increase in the prices of goods and services. When the products in the market have high demand rate, and productivity is not able to cope up with the demands, the scarcity of the products leads to a rise in the prices for the products. There can be various reasons involved in the rise of prices such as natural disasters, unavailability of resources, occupation of private homes to exhaust building demands, etc. During such scarcity of products, people are willing to pay more to avail their needs.

avail their need

How to control

The most effective way of controlling inflation is to reduce the total effective demand by implying alternatives. The banks should provide higher bank rates on the loans for open market operations to reduce the traffic of loan-mongers. There is also a need for credit control, which will allow only a limited amount of credit to one individual. The banks also need to encourage compulsory savings to prevent further inflation.

Deflation

 
Deflation can occur when the resources are produced more than the demand, and as there are no consumers to the goods and services, the prices drop significantly. When the industries become famous for their ideas, other companies start buying the patent to create their own products. This results in an unlimited supply of products. Overstacking of the inventory forces the companies to drop their prices, which leads to deflation. When the prices are lowered, people get encouraged to apply for loans, but the providers tend to refuse such loans due to high demand, which adds up to more deflation. Prolonged deflation in any sectore of the industry can result in affecting the economy of a nation and increased unemployment. It is more dangerous than inflation.

How to control

Deflation affects the production cost, business activity, and employment and it needs to be controlled because unlike inflation, it is a spiral which cannot stop increasing unless the inventory of the industries is decomposed at zero rates. Deflation can be controlled through deficit financing, tax concession, and public work programs, which will provide employment and in the process, will keep the deflation in balance to the other sectors facing inflation.