Inflation, Deflation, and your Finances

Inflation and deflation are terms that simply mean a rising or falling in the money supply. They both affect the price level of goods and services, and they are the exact opposite of each other. They are often both caused by the central bank (this can happen worldwide, we are not just talking about the Federal Reserve) trying to influence interest rates, prices, or to support certain individuals or companies.

Inflation is an increase in the money supply. It is much more common than deflation, indeed, in most countries, it is always happening. Inflation causes there to be more money, therefore the purchasing power of the money decreases, because it is more easily available. This means that each dollar, euro, peso, etc. will be worth less and a good or service will cost more in terms of that currency.

Deflation is rare, since governments want to print money for reasons I do not have time or word count to discuss here. Deflation normally only occurs during a recession or other economic crisis. Thusly, many people blame deflation for the cause of the recession, simply because they do not understand the difference between a correlation and a causality. Deflation does exactly the opposite of what inflation does. Since money is less readily available, each individual unit is worth more, and goods will cost less in terms of that currency.


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