Why are Inflation and Deflation Considered to be Economic Problems?

By BYJU'S Exam Prep

Updated on: September 12th, 2023

Inflation and deflation are considered to be economic problems as they will reduce production, investments, and unemployment. A high inflation rate is an economic problem as the demand for services and goods will decrease drastically, and people’s buying ability will decrease massively.

The quantitative rate of increase in the price of goods is measured by inflation. When there are too many goods available or not enough money in circulation to buy the goods, deflation occurs. Therefore, the cost of goods and services decreases.

Inflation and Deflation as Economic Problems

Prices and wages rise during a period of sustained high inflation, and cash and fixed-income investments may experience a loss in purchasing power as a result of the returns not keeping pace with inflation. Prices, employment, and wages all might decrease during deflations.

High demand for goods and services leads to decreased availability, which causes inflation. A natural disaster that destroys food crops, a real estate boom that depletes construction supplies, etc., are just a few examples of situations where inventory may need to be reduced.

Inflation and Deflation

The Consumer Price Index (CPI) growth rate is used to calculate inflation. It is a hypothetical goods basket that includes the price of transportation, health care, and consumer goods and services. The government tracks the price of goods and services in a basket to understand the power of purchasing using the US dollar.

Deflation happens when there are many goods present or when there is no sufficient money in circulation to purchase the goods. So, the price of services and goods falls.


Why are Inflation and Deflation Considered to be Economic Problems?

Both inflation and deflation are viewed as economic issues because they will have a negative impact on investments, production, and employment. A high inflation rate is a financial issue because it will significantly reduce consumer demand for goods and services and their purchasing power. On the contrary, employment, wages, and prices of goods might decrease during a time of deflation.

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