There are many dynamics affecting the markets in the world economies. With the change of these dynamics, new conditions may arise and a difference in the level of well-being may occur. Let us know about ‘Difference Inflation Deflation Stagflation’.
Concepts such as stagflation, deflation, and inflation, which are often used in economics and whose meanings are confused due to name similarities, actually have different meanings from each other. However, it is important to understand these differences between them to see the developments in the economy.
What Is Inflation?
Inflation can be defined as a constant and significant increase that occurs since the amount of money in the economy increases more than the number of goods and services. Inflation is an economic process that occurs when there is a constant increase in prices at a general level, which is the opposite of deflation. The instantaneous increase or decrease in the price of a good cannot be called inflation. In this process, there is a decrease in the purchasing power of money. For example, if you buy a product that you bought for $ 150 at the beginning of the year for $ 200 at the end of the year, it may be mentioned that the purchasing power of money is reduced.
Why Causes Inflation?
- Due to the increase in demand for goods and services, that is, if demand is greater than supply, prices will increase.
- If there is an increase in the cost of labor, capital, and natural resources, there is also an increase in the prices of products.
- As a result of the fact that the amount of expenditures and exports exceeds the amount of production and imports, prices also increase.
What Are The Consequences Of Inflation?
Inflation brings uncertainty to the national economy.
- It prevents the investor, entrepreneur, and businessman who will invest because prices will increase.
- New employment opportunities are not provided because investments are abandoned. Because the economy is stagnating, there will be layoffs, that is unemployment will increase.
- Since it negatively affects the economic structure and foreign investment in the country, its competitiveness with other countries is also negatively affected.
What Is Stagflation?
A recession means the economy. It is derived from the English words “stagnant” which means stagnation, and inflation. In this economy, unemployment and the general level of prices, that is, inflation, are increasing together. Normally there is an inverse relationship between inflation and unemployment in economic theory. This relation can be seen in Phillips Curve. An example of this is the oil crisis in the 1970s for stagflation, which is the opposite situation. During this period, oil prices increased and there was an economic recession. Increases in exchange rates can be summarized as a situation where the demand for products, services, and employment is falling while there are increases in imported product prices and energy costs.
What Causes Stagflation?
Stagflation is the continuation of high inflation when there is a recession in the economy, that is when there is a recession situation. The fact that unemployment is increasing, growth is not experienced and inflation is becoming constant is one of the symptoms of stagflation.
- A situation occurs when the money supply increases faster than production.
- Fluctuations in exchange rates occur.
- There is an increase in the prices of energy resources.
What Are The Consequences Of Stagflation?
- The prices of basic living necessities increase.
- Investments are reduced.
- There is an increase in the unemployment rate.
If the economy is not growing while experiencing the phenomenon of inflation in an economy, it means that there is a state of stagflation (stagnation in inflation) in that economy. The oil shock in 1974 led to the emergence of the phenomenon of stagflation in many countries.
What Is Deflation?
Deflation refers to a period when prices are constantly falling, as opposed to inflation. During this period, when the inflation rate is negative, the demand for goods and services decreases, and consumers postpone their spending due to a decrease in prices. This situation leads to a slowdown in economic activity and an increase in unemployment. To get out of deflation, some measures can be taken that increase consumption and stimulate the economy again. For example, credit facilities can be increased, cheap consumer loans can be provided, investments made by the state can be increased, income and corporate taxes can be increased and investors can be directed to consumption instead of savings. This situation refers to periods in which the increase in the inflation rate decreases, not the periods when prices decrease continuously.
What Causes Deflation?
- Increasing the savings of households and businesses
- Failure to transform savings into productive investments
Deflation is an economic process that occurs when there is a constant decrease in prices at the general level. The important part here is that prices are constantly falling at the general level. because a decrease in the price of one or more goods or a one-time decrease in the price of all goods at the general level cannot be called deflation.
What Are The Consequences Of Deflation?
It is the opposite case of inflation. No one wants to spend money because prices will fall. Since everyone will keep their money, the demand for goods and services will decrease, production will decrease, and unemployment will occur. It brings with it the shrinking of the economy.
- Falling national income and employment.
- An increase in inventories and unemployment is observed.
- There is a decrease in the level of well-being and wages.
Due to low profits, production decreases, so there is also a decrease in the labor force. As incomes decrease, consumption also decreases and there is an economic recession.
As a result, the concepts of stagflation, deflation, and inflation have different meanings from each other. Some of them may be the exact opposite of each other. For this reason, it would be best to seek help from the discipline of economics to learn the decisive differences.