Deflation vs. Inflation: What's the Difference?
When the cost of living decreases, you are experiencing deflation. Deflation means that your purchasing power increases as the price of goods and services declines relative to their value at a previous time. If you had $100 when inflation was 10 percent, your purchasing power was reduced to $90 once the inflation occurred. In deflation, your purchasing power increases to $100 as prices decrease 10 percent from $90 (the new baseline). The opposite of deflation is inflation, which occurs when purchasing power decreases because the cost of goods and services increases relative to their value at a previous time.
Signs of an economic boom
Economic booms are caused by excessive growth in the money supply, and they're accompanied by rising prices in an economy. This is because an increase in the money supply will drive up inflation, when prices rise for all goods and services across the entire economy. Prices can even spike so dramatically during a boom that hyperinflation ensues.
Signs of an economic bust
In an economic bust, people will have less money to spend because their salaries are going down or they're out of work. That lack of spending can cause businesses to close and ultimately leads to a recession and deflation.
How to prepare your finances for an economic downturn?
1) Make sure you have an emergency fund that covers at least three months of your expenses.
2) Invest any excess cash in assets, such as stocks, bonds, and mutual funds, that are known to do well during inflationary periods.
3) Review your insurance policies and see if you're adequately covered against potential risks like job loss or illness.
How a government controls deflation?
In many cases, deflation results from a period where demand for goods and services falls. A country with high unemployment and stagnant wages creates an environment where people will not buy as much because they have less disposable income. A government may attempt to counteract deflation by increasing the money supply in order to make it easier for consumers to afford goods and services. This policy is most often used when a country already has high levels of inflation or if there are fears that deflation may occur in the future.
How a government controls inflation?
There are three main ways that a government can control inflation. These include increasing interest rates, reducing the money supply, and adjusting prices. Higher interest rates make it more expensive for businesses to borrow money and will slow down economic growth as businesses are less likely to invest in expanding their company as they worry about profit margins. Reducing the money supply will cause deflation, which is when prices decrease due to an increase in demand for goods or services and a lack of supply to meet that demand.
Tips for dealing with high prices
High prices can be tough, but there are a few ways to save money and stay afloat during these tough economic times. I have a few tips that might help you out, so let's take a look at them!
1) Start cooking at home more often! It'll be cheaper than eating out and it'll also be healthier too! 2) Get in touch with your local farmer or grow your own vegetables in your backyard! You'll get fresher produce that way and it'll be cheaper too.