Inflation, Hyperinflation and Deflation
All the economy is strongly related to rise in inflation (CPI). If is an important economical indicator, which not only is interesting for economist but also to a housewives because on inflation depends all the prices. Or it would be more exact to say that inflation depends on prices of everything. In one way or another inflation is a parameter that shows how prices of portfolio of goods and services is changing. If prices are going up, that is the inflation. If prices are going ip fast then is high inflation.
Why is it is inflation so important? Well, inflation is not so important if it is a normal inflation. A normal or healthy inflation is in between of 1%-3%. Otherwise inflation is too high or too low. Bot cases are bad for economy. If inflation is too low or negative which would cause deflation, then economy is not healthy. Everybody starts to accumulate money and spending stops, which makes damage for retails sales. Retail sales decreases the production of the factories, when factories are laying off the employees and reduces the wages. It is a bad circle which nobody wants to come. Then the another thing very high inflation is also very bad. The worst thing about high inflation is that such inflation can turn out of control and become a hyperinflation.
Hyperinflation is inflation that is very high. Sometimes hyperinflation may reach thousands of annual percent in price increases. If is hardly imaginable situation during normal economical conditions, because such rates just look to unreal, but the thing is that inflation spiral makes the job. The inflation spiral is that at first inflation grows by little, then everybody see that prices are going to increase faster, then labor demands for higher wages because the prices of everything are increasing and they need to live. In other way manufacturers also starts to increase prices of products because wages are increasing and prices for supplies are increasing too. That how inflation spiral creates the hyperinflation.
The bad thing about super high inflation is that it hurts not only economy but also the investment market. In the worst situation are investors who have invested in bonds or other fixed income securities or just holds the cash. While cash may be a good investment during some calm periods or stock market crashes but it is the worst investment when the hyperinflation comes in the economy. Money are loosing the real value in such case so quickly that they become as worth as simple paper.
Just try to imagine the life when inflation reaches more that 500% per one month. That is a real example. Do you understand what means such hyperinflation. It means that when you get a salary at the beginning of the month you may buy for it 10 pieces of bred when at the end of the same month you can for that amount afford only 2 pieces of the same bred. Yes, that is hyperinflation. A good thing that stocks more or less are resistant to such a thing as inflation.
Deflation is not that bad as inflation is, but still is not a good thing either. Healthy economy should have some inflation positive but at low rates. If inflation is negative, that means deflation. Deflation is when prices or goods and services are falling down. Deflation is quite good for bond holders but isn't very good for economy.
The thing is that economy is weak during deflation (negative inflation). The decreases in prices is usually caused by by lack of demand for goods and services. If there is no demand there is fuel in the economy, if there is no fuel economy slows down which causes recession. It is not necessary that every recession would have a deflation, but usually recession that comes together with deflation may come for a very long term.
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