Simply put, deflation is a drop in the overall levels of prices in an economy and is usually triggered by decreased spending. Accompanied then by a rise in the purchasing power of the local currency, it’s the opposite of inflation – where costs increase instead.
With the rising cost of living leaving millions in unprecedented financial difficulty, many people are already starting to cut back on retail purchasing. Read our quick guide below for more information on deflation and how the turbulent global economy might affect your area in the near future.
Deflation: What is it and what causes it?
With deflation, prices for consumer goods and assets fall gradually. Simply put, you’d be able to buy more of the same products with the same amount of money the following week. This might initially seem like a positive thing for consumers, but it can be a sure sign of imminent recession.
There are two main factors that trigger deflation. These include:
- Rising interest rates
As monetary policies trigger people to save their money instead of spending it, consumer demands fall. This leads to a drop in prices to encourage trading.
- Low consumer confidence
Unfortunate global events – including the pandemic – might lead to a decrease in demand and concern over the economy. In turn, this discourages spending.
How can you earn during deflation?
To protect themselves against deflation, companies and individual investors might choose to buy investment bonds, consumer shares, and to keep their money in cash.
Protecting yourself against an unexpected change in your local economic situation is a good idea and doing so with the help of an experienced forex trader is the most sensible approach.
Deflation or inflation: what’s worse?
Neither deflation nor inflation put any economy in an ideal position, but the severity depends on the circumstances. For example, if deflation occurs through a low consumer demand or overall market inefficiency, it can be worse than inflation.
However, deflation might be more favourable than inflation if it is caused by refined technologies that enable the costs of goods and services to become cheaper.
How are leading economies coping?
- European Union
Even though the European Union operates as a single market, it’s made up of 27 countries and accounts for 15% of the world’s trade in goods. Since deflation would mean a long-lasting, widespread decline in prices, the risk is determined on a country-by-country basis for the EU.
- United States of America
Throughout the course of 2022, the US economy has been racked with high inflation. Ever since the start of the Covid-19 pandemic, millions of Americans had been either without work or temporarily laid off. If consumers slow down on their spending, deflation could be possible once prices fall.
Should I be worried about deflation?
The bottom line is that a little bit of deflation is a product of economic growth, and can even be good for promoting it. However, if an economy is already struggling with bank-fuelled debt, a financial crisis and recession might be inevitable if prices start to fall rapidly.
Deflation will always be associated with the ebb-and-flow pattern of banks inflating the supply of money and credit. It’s essential to be prepared by investing in the right places at the right time.