Difference Between Inflation and Deflation

Published on 06-May-2023

Feature	Inflation	Deflation
Definition	Inflation is a sustained increase in the general level of prices of goods and services over a period of time.	Deflation is a sustained decrease in the general level of prices of goods and services over a period of time.
Price Level	Inflation is characterized by an increase in the price level of goods and services.	Deflation is characterized by a decrease in the price level of goods and services.
Money Supply	Inflation is typically caused by an increase in the money supply, which leads to an increase in demand for goods and services.	Deflation is typically caused by a decrease in the money supply, which leads to a decrease in demand for goods and services.
Purchasing Power	Inflation reduces the purchasing power of money, as prices of goods and services increase.	Deflation increases the purchasing power of money, as prices of goods and services decrease.
Interest Rates	Inflation leads to an increase in interest rates, as lenders try to protect their returns from the effects of inflation.	Deflation leads to a decrease in interest rates, as lenders try to stimulate borrowing and spending.
Money Demand	Inflation leads to a decrease in the demand for money, as people try to spend their money before its value decreases further.	Deflation leads to an increase in the demand for money, as people hold onto their money in anticipation of further price decreases.
Production	Inflation can encourage production, as producers try to take advantage of higher prices.	Deflation can discourage production, as producers try to cut costs and reduce prices.
Debt	Inflation reduces the real value of debt, as the amount borrowed becomes easier to repay with inflated dollars.	Deflation increases the real value of debt, as the amount borrowed becomes more difficult to repay with deflated dollars.
Investment	Inflation can encourage investment, as investors seek to protect their assets from the effects of inflation.	Deflation can discourage investment, as investors become wary of investing in an environment of decreasing prices.
Wage Adjustments	Inflation leads to wage adjustments, as workers demand higher wages to keep up with the rising cost of living.	Deflation leads to wage reductions, as workers accept lower wages to keep their jobs in an environment of decreasing prices.
Business Cycles	Inflation can be a sign of a healthy economy in the expansion phase of the business cycle.	Deflation can be a sign of an unhealthy economy in the contraction phase of the business cycle.
Currency Value	Inflation decreases the value of a country's currency in relation to other currencies.	Deflation increases the value of a country's currency in relation to other currencies.
Economic Growth	Inflation can stimulate economic growth by increasing consumption and investment.	Deflation can hinder economic growth by decreasing consumption and investment.
Price Expectations	Inflation leads to higher price expectations, as people anticipate further price increases in the future.	Deflation leads to lower price expectations, as people anticipate further price decreases in the future.
Asset Prices	Inflation can lead to an increase in asset prices, such as real estate and stocks.	Deflation can lead to a decrease in asset prices, such as real estate and stocks.
Consumer Behavior	Inflation can encourage consumer spending, as people try to buy goods and services before prices increase further.	Deflation can discourage consumer spending, as people hold onto their money in anticipation of further price decreases.
Central Bank Response	Inflation can be countered by raising interest rates and decreasing the money supply.	Deflation can be countered by lowering interest rates and increasing the money supply.