“DEFLATION” – A DEEPER INSIGHT

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By divya

Published: August 16, 2009

All About Deflation

The opposite of  Inflation, “Deflation” is decline or fall in the price levels of commodities and services for a certain period of time due to the contraction or reduction of money and credit supply .

Whenever Inflation rate goes below zero percent or in the worst cases goes negative, it is said to be a state of deflation. Deflation can also be due to the reduced spending by both personal and government.

What does Deflation Do?

The other side of Inflation causes Deflation. During Deflation, Consumers or buyers will put their buying decision on  hold expecting the prices to go down further. Now let’s see what happens during Deflation;

• Increase in Money Value
• Increased demand for liquity
• Increased unemployment
• Economic slow down or Depression
• Reduced profit
• Increase in Purchasing power of money
• Decrease in demand of products & services

Deflation 2009

India being the third largest economy in Asia, fell into a state of deflation during the first week of June 2009. Inflation rate went negative to 1.61 percent during the first week of June per the Wholesale Price Index(WPI). This records to be the biggest in the last 30 years, per the Central bank.

“Reserve bank of India” had to slash its reverse Repo rate from 1 to 0.5 percent hoping to stabilize the economy.

Tagged with: Contraction of money supply, Decline, Deflation, Deflation 2009, Negative inflation

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