Deflation: Exploring the Meaning, Impact, Winners, and Losers

Not everybody's a winner!

• Inflation is a rise in the general price level of goods and services in an economy. We haven't seen much high inflation in recent decades, but we are now! When it appears, the effects can be devastating.
• Inflation is most commonly measured by the increase in the Consumer Price Index (CPI). But it would be better to think of it as a decrease in the amount of stuff you can buy with your money. 
• Deflation is the opposite of inflation, with the general price level of goods and services decreasing.

Deflation 

Deflation is the opposite of inflation, with the general price level of goods and services going down. If you stashed away $200 for a year, and deflation was -2.5%, then your $200 would be able to purchase $205 worth of goods and services a year later.

Good news, right?

Unfortunately, not everybody’s a winner. There’s a seller behind those goods and services whose revenue no longer has the same purchasing power. If you believed that something you desired would cost you less next week and even less the week after, would you not be put off purchasing? Poor sellers. Imagine if other people were doing the same with your company and all of its products? One way to combat falling selling prices would be to cut input costs such as wages... maybe even your wages! 🥺

Suppose the scenario of job losses took place on a broad scale, leaving many jobless. Those lower prices may no longer be affordable for those recently unemployed, meaning that businesses further reduce prices, causing a spiral effect of unemployment.

Deflation doesn’t just impact unemployment levels. A fall in the general price level means that a borrower’s debt (e.g. mortgage, student debt, credit card debt) will increase in real value - meaning relative to the prices of everything around it, including, possibly, your wages. For example, say a property purchased for $200,000 drops in value by $20,000. The remaining mortgage, however, remains the same, meaning you might even be paying back a mortgage on a house with a greater value than the house itself is worth. 

(Deflation is not to be confused with "disinflation", which is a temporary slowing of the rate of inflation, i.e. prices are still going up, but doing so by less in percentage terms than before.)

Singapore’s Monthly CPI Figures Over the Past Decade:

Deflation has been quite frequent! However... it doesn't look like reappearing anytime soon. 

DEFLATION BASICS. COMPLETED. ✅

Sources:

1. https://www.singstat.gov.sg/modules/infographics/consumer-price-index
2. https://www.vox.com/2014/7/24/18080392/inflation-definition-and-explanation
3. https://www.bankofengland.co.uk/knowledgebank/what-is-deflation
4. Header photo from Unsplash