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What is the difference between Inflation and Deflation?

Sep 29, 2015 11:31 IST

    There is so much controversy and confusion around the term Inflation and deflation among students. Here, the banking team of Jagran josh is providing the basic difference between these terms.

    What is inflation?

    Inflation is simply a measure of the extent of increase in prices. If onions cost Rs.100 per kg in September 2014, and if they cost Rs.110 per kg in September 2015, then inflation in the price of onions was 10 per cent. When this happens across prices of all commodities for a relatively sustained period of time, then one can say the economy is experiencing inflation. Looking at consumer prices, India is still undergoing inflation. That is, prices are still increasing. For example, in August 2015, overall consumer prices were 3.7 per cent higher than they were in August 2014.

    When inflation is coming down:

    All that means is that the rate of increase of prices is slowing. Going back to the example of onions, if they were Rs.110 per kg in September, then went to Rs.120 per kg in October, Rs.125 in November and Rs.127 in December, one can see that although the price is still going up, the rate of increase is decelerating.

    The U.S. Federal Reserve often uses the term ‘disinflation’ to refer to a period where the rate of inflation has been slowing on a sustained basis. So, looking at the Consumer Price Index (CPI), India is currently technically going through a phase of disinflation. The rate of inflation as measured by the CPI was 10.7 per cent in August 2013, which came down to 3.7 per cent over the course of two years.  

    What is deflation?

    Deflation is simply the opposite of inflation. That is, prices fall from one period to the next. The confusion comes from the fact that deflation has historically generally been accompanied by significant economic contraction. But that is not the case in India.

    Real GDP growth, the final figure that the government presents, is calculated by looking at how the value of the total production of the economy has changed compared to the previous year, and then reducing the effect of inflation/deflation from this. If the rate of growth of the economy and prices are both falling, then that is not a good place to be in — as it is usually accompanied by rising unemployment, lower demand, falling corporate earnings, reduced investments, etc.

    This gets exacerbated when people begin to expect prolonged deflation. If they expect that prices will be lower in the future, then people and companies both defer their investments and expenditure waiting for those lower prices. This postponement of expenditure hurts the economy.  But slowing inflation coupled with about 7 per cent GDP growth and a pickup in domestic demand — as India is experiencing now — is not a bad thing in itself. Following an extended period of double-digit inflation, this cooling off of prices may just be a correction.

    Hyperinflation:

    There is such a thing as hyperinflation, when the rate of increase of prices is beyond anything seen in normal circumstances. It can be define as a situation where the price increases are so out of control that the concept of inflation is meaningless.

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