A lot of terms are being thrown around right now, and a lot of guesses as to what the future holds for the economy. I thought I would give a very brief and simple explanation for three terms you might have seen and heard about recently.
Inflation – a general increase in the price of goods. So if product xyz costs $100 today, it might cost $110 next week. In some cases, inflation can cause a wage-price spiral in which wages keep chasing prices, so as prices go up, there is pressure for wages to go up, which then causes companies (because of costs) to raise prices again, etc. If you have fixed debt, a little inflation is not bad in that you will be paying off your debt with “cheaper” dollars (and hopefully getting pay raises). Hyperinflation is just inflation on steroids – where the price of goods and services goes up dramatically, often daily. Think of needing a wheelbarrow to carry the money needed to buy a loaf of bread.
Deflation – the opposite of inflation. In this case, there is pressure on prices to go down. So if product xyz costs $100 today, next week it might only cost $90. While in the short run this may seem good, in the long run it is devastating. People wait to purchase things because the price will be lower in the future, so sales decline. As prices plummet, companies are forced to cut prices, then to cut costs, then cut jobs. High unemployment results. It is a very vicious cycle that is hard to get out of – like inflation, it can cause a wage-price spiral, only in this case in a downward direction. Fixed debt is heavy burden in this type of economy.
Stagflation – slow or negative economic growth, with high unemployment and inflation. So as inflation causes prices to go up, salaries remain fixed or lowered because of economic pressure on wages (cutting costs). So a huge gap opens up between wages and prices. This is what happened in the 1970′s.
So what is going to happen? Economists are all over the map on this one. Right now there is deflationary pressure on the price of goods. This will probably continue through the holidays and into the beginning of next year. At the same time, we see the price of a barrel of oil beginning to inch upwards. And, the Federal government has put a lot of money into the monetary system. If not handled properly, this will put a lot of inflationary pressure on the economic system.
It is not a time to fear, but to be wise financially. Cut costs where you can, save for emergencies, pay down debt.
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Inflation, Deflation, Stagflation
by JD on October 8, 2009
A lot of terms are being thrown around right now, and a lot of guesses as to what the future holds for the economy. I thought I would give a very brief and simple explanation for three terms you might have seen and heard about recently.
Inflation – a general increase in the price of goods. So if product xyz costs $100 today, it might cost $110 next week. In some cases, inflation can cause a wage-price spiral in which wages keep chasing prices, so as prices go up, there is pressure for wages to go up, which then causes companies (because of costs) to raise prices again, etc. If you have fixed debt, a little inflation is not bad in that you will be paying off your debt with “cheaper” dollars (and hopefully getting pay raises). Hyperinflation is just inflation on steroids – where the price of goods and services goes up dramatically, often daily. Think of needing a wheelbarrow to carry the money needed to buy a loaf of bread.
Deflation – the opposite of inflation. In this case, there is pressure on prices to go down. So if product xyz costs $100 today, next week it might only cost $90. While in the short run this may seem good, in the long run it is devastating. People wait to purchase things because the price will be lower in the future, so sales decline. As prices plummet, companies are forced to cut prices, then to cut costs, then cut jobs. High unemployment results. It is a very vicious cycle that is hard to get out of – like inflation, it can cause a wage-price spiral, only in this case in a downward direction. Fixed debt is heavy burden in this type of economy.
Stagflation – slow or negative economic growth, with high unemployment and inflation. So as inflation causes prices to go up, salaries remain fixed or lowered because of economic pressure on wages (cutting costs). So a huge gap opens up between wages and prices. This is what happened in the 1970′s.
So what is going to happen? Economists are all over the map on this one. Right now there is deflationary pressure on the price of goods. This will probably continue through the holidays and into the beginning of next year. At the same time, we see the price of a barrel of oil beginning to inch upwards. And, the Federal government has put a lot of money into the monetary system. If not handled properly, this will put a lot of inflationary pressure on the economic system.
It is not a time to fear, but to be wise financially. Cut costs where you can, save for emergencies, pay down debt.