Inflation
·
The
rate at which the prices of goods and services increase over a period (can be
monthly or annually), is known as Inflation.
·
The
set of goods and services chosen for calculating the rate of Inflation differs
from economy to economy, considering several domestic factors.
·
Example
- Inflation
Let us
assume a set of goods and services can be bought at Rs.100 at the start of
2021.
After
following rate of inflation each year, the same set of goods and services will
be available at following prices at end of each year:
2021 -
Inflation rate is 5% - Rs. 105
2022 -
Inflation rate is 6% - Rs. 111.30
2023 -
Inflation rate is 4% - Rs. 115.75
Deflation
·
The
rate of decline in prices of goods and services over a period (can be monthly
or annually), is known as Deflation.
·
It
is simply the fall in prices of goods and services.
To look at
it from different perspective,
·
Deflation
is said to have occurred when the Inflation rate falls below zero (0)% i.e.,
goes into negative territory.
·
Example
- Deflation
Continuing
the above example,
Let us
assume a set of goods and services can be bought at Rs.100 at the start of
2021.
After
following rate of Deflation or Negative Inflation each year, the same set of
goods and services will be available at following prices at end of each year:
2021 -
Inflation rate is (-4)% - Rs. 96
2022 -
Inflation rate is (-2)% - Rs. 94.08
2023 -
Inflation rate is (-3)% - Rs. 91.2576
·
Disinflation
·
The
decline in the rate of inflation over a period (can be monthly or annually), is
known as Disinflation.
·
In
Disinflation, the prices of goods and services are still rising, but the rate
of rising is slower than before.
·
Example
- Disinflation
Let us
assume a set of goods and services can be bought at Rs.100 at the start of
2021.
At end of
each year, accounting for following rate of inflation, prices will be as
follows:
2021 -
Inflation rate is 8% - Rs.108
2022 - Inflation
rate is 5% - Rs. 113.4
2023 -
Inflation rate is 2% - Rs. 115.668
·
So
here, the prices are rising every year from 2021, but the rate of inflation is
slowing year on year, that will be called the period of Disinflation.
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