8/2/2019 Eco Terms - Inflation

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Inflation: In economics, inflation is a rise in the general level of prices of goods and services

in an economy over a period of time. When the general price level rises, each unit of

currency buys fewer goods and services. Consequently, inflation also reflects an erosion in

the purchasing power of money  – a loss of real value in the internal medium of exchange

and unit of account in the economy. A chief measure of price inflation is the inflation rate, the

annualized percentage change in a general price index (normally the Consumer Price Index)over time. 

Stagflation is a state in which inflation rate is high and the economic growth rate slows

down and unemployment remains high. It raises a dilemma for economic policy since actions

designed to lower inflation or reduce unemployment may actually worsen economic growth.

The major reasons for stagflation have been-supply shocks or shortages due to unforeseen

reasons which push up prices of essential commodities, causing an inflationary situation and

at the same time pushing up production costs, as it happened in 1970s in the US.

Deflation: In economics, deflation is a decrease in the general price level of goods and

services. Deflation occurs when the inflation rate falls below 0% (a negativeinflation rate).

This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when

inflation declines to lower levels). Inflation reduces the real value of money over time;

conversely, deflation increases the real value of money  – the currency of a national or

regional economy. This allows one to buy more goods with the same amount of money over

time

A general decline in prices, often caused by a reduction in the supply of money or credit.Deflation can be caused also by a decrease in government, personal or investment

spending. The opposite of inflation, deflation has the side effect of increased unemployment

since there is a lower level of demand in the economy, which can lead to an economic

depression. Central banks attempt to stop severe deflation, along with severe inflation, in an

attempt to keep the excessive drop in prices to a minimum.

The decline in prices of assets, is often known as Asset Deflation.

Disinflation: A slowing in the rate of price inflation. Disinflation is used to describe instanceswhen the inflation rate has reduced marginally over the short term. Although it is used to

describe periods of slowing inflation, disinflation should not be confused with deflation.

Disinflation is commonly used by the Federal Reserve to describe situations of slowing

inflation. Instances of disinflation are not uncommon and are viewed as normal during

healthy economic times. Although sometimes confused with deflation, disinflation is not

considered to be as problematic because prices do not actually drop and disinflation does

not usually signal the onset of a slowing economy.

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Hyperinflation: Extremely rapid or out of control inflation. There is no precise numerical

definition to hyperinflation. Hyperinflation is a situation where the price increases are so out

of control that the concept of inflation is meaningless.

When associated with depressions, hyperinflation often occurs when there is a large

increase in the money supply not supported by gross domestic product (GDP) growth,resulting in an imbalance in the supply and demand for the money. Left unchecked this

causes prices to increase, as the currency loses its value.

When associated with wars, hyperinflation often occurs when there is a loss of confidence in

a currency's ability to maintain its value in the aftermath. Because of this, sellers demand a

risk premium to accept the currency, and they do this by raising their prices.

One of the most famous examples of hyperinflation occurred in Germany between January

1922 and November 1923. By some estimates, the average price level increased by a factor

of 20 billion, doubling every 28 hours.

Source: Investopedia, Wikipedia