Understanding Inflation And Deflation

Understanding Inflation And Deflation

If you are planning to invest your money, then the first thing you need to learn is inflation. You need to understand all about inflation and why it matters to know about inflation in managing your investment portfolio.  If you want to make money from your investments, you should know about the inflation and how to tackle it so that your portfolio shows profitability.

Inflation refers to the depreciating value of the currency unit. It means that it now takes more units of currency to purchase the same quantity of services or goods as it did earlier.  Most of the people think it has increased in the cost of the things which are necessary to survive like bread, butter, cheese, oil, shelter, medical services, clothing, etc.  You should be aware of inflation if you are into trading of currencies. If you are using the software to conduct a transaction for you, then you need not worry as this trading software will take all these parameters into account. Learn more about trading here.

Deflation refers to the situation when the prices fall. You will find both deflation and inflation in different asset class at the same time.  Both are not good for the growth of the economy when they are in extremes.  The central bank of the country takes varied steps to control both the situations.

Causes of deflation and inflation

The inflation is caused by three situations. The first situation is cost-push inflation.  This situation arises when the supply of services or goods gets restricted while the demand remains the same.  For instance, when there is a shortage of wheat, the price of wheat will shoot up. The second situation is the demand-pull situation. This situation happens when the demand outstrips supply.  The third situation arises when the money supply of a nation over expands that is too much of money chasing very few services or goods. This happens when the economy adopts too-expansive monetary or fiscal policy that creates high liquidity in the system.

Drop in demand causes the deflation.  Few people to buy the products means the businesses need to lower prices and also it can lead to a bidding war. The drop in demand for various products can be caused because of the changes in technology.  Also, it can be caused by the changes in the exchange rate.

Both the inflation and deflation can be controlled only the government intervention by changing its fiscal and monetary policies.






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