36 Finance Monthly. Economics 101 INFLATION: The Rising Tide Inflation is an economic term that refers to a general increase in prices and a corresponding decrease in the purchasing power of money. It means that over time, a dollar (or any other currency) gradually buys less and less. To illustrate, let’s say a movie ticket costs $10 today. With an annual inflation rate of 2% (a typical target for many central banks), the same ticket would cost $10.20 next year, $10.40 the year after, and so forth. Moderate inflation is usually seen as a sign of a healthy economy: it tends to indicate that consumers are spending, businesses are investing, and the economy is growing. However, if inflation gets too high, it can erode purchasing power and make life more expensive, which is especially problematic for those on fixed incomes. DEFLATION: The Downward Spiral Deflation is the opposite of inflation - it’s when prices decrease over time. While this might sound like a good thing (after all, who wouldn’t want things to be cheaper?), sustained deflation can be harmful to the economy. Here’s why: if consumers expect prices to fall, they might delay their purchases, which can reduce overall demand. This reduced demand can cause businesses to cut back production, leading to layoffs and further decreasing demand. It’s a vicious cycle that can lead to a long period of economic decline. Furthermore, deflation increases the real value of debt. If prices and incomes are falling, it becomes harder for people and businesses to repay their loans, which can lead to defaults and financial instability.
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