Over many decades, economic cycles go through periods of deflation, inflation, and stagflation. Each of these has a unique effect on the overall economy and sometimes can lead to prolonged periods of depressions or recession in the economy.
Deflation is a drastic fall in the level of prices in an economy and an increase in the currency’s purchasing power. It can be induced by an increase in productivity and the abundance of services and goods by decreasing total or aggregate demand or a reduction in credit and money supply.
To some degree, moderate drops in some products, such as energy or food, even positively affect unnecessary consumer spending. Beyond these basic staples, a general, tenacious fall in all prices allows people to consume more and boost economic growth and stability by enhancing money as a store of value and boosting real savings.
However, under certain circumstances, rapid deflation can be associated with short-term economic activity contraction. In general, this can transpire when an economy is densely laden with debt and dependent on the constant extension of credit supply to inflate asset prices by financing speculative investment. Consequently, when the number of credit contracts, asset prices fall, and dangerous over-investments are liquidated. This is sometimes known as debt deflation. Otherwise, deflation is usually a positive feature of a healthy, growing economy that reflects technological progress, increasing abundance, and rising living standards.
Inflation is a quantitative model of the rate at which the standard price level of a basket of chosen goods and services in an economy increases over a time period. It is the rise in the overall level of prices where a currency unit ultimately buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in a nation’s currency’s purchasing power.
As prices rise, a single currency unit loses value as it buys fewer services and goods. This loss of purchasing power impacts the general cost of living for the public, leading to a contraction in economic growth. Economists agree that sustained inflation occurs when a country’s money supply growth outpaces economic growth.
To combat this, a nation’s relevant monetary authority, like the central bank, then takes the required measures to keep inflation within allowable limits and keep the economy running smoothly.
Inflation is measured in various ways depending upon the kinds of services and goods considered and is the reverse of deflation, which indicates a broad decline in prices for services and goods when the inflation rate falls below 0%.
When you have a slow economy with extremely high inflation rates and widespread unemployment, stagflation is usually the result. When the economy does not grow and prices continue to rise, you have a stagflation cycle. Stagflation was first identified during the 1970s, where many developed economies high unemployment and sustained rapid inflation due to an oil crash.
Stagflation is thus defined by sluggish economic growth and comparatively high unemployment—or financial stagnation—which is at the same time followed by rising prices (i.e., inflation).
hyperinflation in where you have high levels of inflation the get out of control and ultimately renders the currency worthless. It happens when there is a massive increase in the money supply and no growth or increase in the output of services and goods.
A most recent example of hyperinflation where a currency was reduced to virtually nothing is Venezuela, where 1 billion in local cash buy as little as a cheeseburger.