You may have heard the economic terms inflation, deflation, and hyper-inflation. We’ll explain what these terms mean.
When too much money chases too few goods, we have inflation. Inflation happens when prices increase due to high demand and either a decrease in supply or a supply that doesn’t keep up with demand.
In theory, the recent infusion of cash in the form of aid due to the pandemic, could lead to an increase in demand because people are going to spend that money.
Inflation can be slowed or avoided if the excess money is saved and not spent. Inflation isn’t entirely bad unless it happens quickly creating hyperinflation.
When prices of goods and services increase significantly and quickly, hyper-inflation happens. This devalues currency and if severe, some people may trade other things of value instead of currency. This could be livestock, gold or other goods that are easily traded.
Hyper-inflation usually results when a government incurs financial or political stress. Wars and declining tax revenue are some of the culprits.
The opposite of inflation is deflation. This is when prices decrease usually due to excess supply of goods and a decreased demand for those goods. Deflation can also happen when there is a decrease in the money supply from a reduction of debt availability, (banks aren’t lending or are making it more difficult to obtain a loan), or when there is a cash outflow from an economy, (investing in foreign markets instead of domestic investment).
While the U.S. economy remains healthy, understanding these basic economic principles may help you to interpret what economists are saying and how supply and demand influence prices.
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