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When you flip a coin, you are going to have 2 choices: heads or tails (and landing in the middle is not an option!). Now imagine that inflation stands for heads and deflation stands for tails. Which one will you choose? Well, if you are a regular person in the public, you would have coined the term “inflation” as bad due to its bad perception from the media, and you would probably choose “deflation” since it means low prices. However, this assumption overlooks the fact that both scenarios are exact economic opposites, where one is beneficial and the other is detrimental. In reality, both scenarios cause a serious risk to all consumers, employees, and the general economy.
Before we delve deeper, let’s understand the full meaning of both terms. In short, inflation means “an increase in price for goods and services over time.” In other words, each “unit of currency (dollar, for example) can only buy fewer goods and services than before.” On the other hand, deflation means a “decrease in price for goods and services”, meaning that the same value of currency can buy more goods and services than before. And while deflation might be good at first, it was also the impetus for the Great Depression and the Great Recession. So how does it really affect a nation as a whole?
Consumers
When inflation hits, consumers are pressured to spend most of their income on daily needs (prices constantly increase), leaving less room for savings and emergencies. That is to say, as prices rise by a higher growth factor (10%-50% increase annually) than wages (3%-10% increase annually), households experience a decline in purchasing power. Deflation, in contrast, encourages consumers to delay their spending in anticipation of lower prices. This delay leads to a decrease in demand, which weakens the revenue/profit aspect of the business and the overall momentum of the economy.
Employees/Employers
Since employees are a subset of consumers and the effect of consumer behavior, inflation negatively impacts their work by weakening every dollar of their wage (increasing prices), even if their paycheck remains the same. But employers can increase their employees’ paychecks, right? Well, the simple answer is no. Since a company’s revenue is also affected by the increasing production costs (influenced by inflation), employers will be slow to increase wages due to uncertainty about costs and profit pressures. However, unlike consumer benefits with a deflationary economy, deflation poses a more direct threat to the employees because it increases the probability of wage/salary cuts, freezes in hiring, and worst of all, layoffs. In both cases, employees are the most affected and bear the burden of the economy through the risk of income security. Additionally, since 100% of employees are consumers, both inflation and deflation affect consumers in an indirect way.
Economy
Inflation, especially hyperinflation, creates uncertainty for businesses since it complicates both pricing/revenue and investment, which in turn makes it hard for businesses to predict the planning for the future market and the execution of it. This incident, caused by hyperinflation, was shown in the highest record inflation in Hungary from 1945-1946 (after World War 2), where the inflation peaked at 41.9 quadrillion percent (4.19 x 10^16%) monthly. Due to reparations from the Second World War, the price of an item in Hungary doubled exactly every 15 hours, which crashed the Hungarian pengo, resulting in an 80% decrease in industrial production, and erasing all of the country’s savings.
Deflation, meanwhile, halts economic growth by discouraging investments and an increase in a real burden of debt. This scenario was shown in both instances, specifically in the US: The Great Depression (1929-1933) and the Great Recession (2007-2009). During the Great Depression, the US’s international trade fell by over 50%, consumer prices dropped nearly 10%, and employment plummeted as the economy collapsed. 75 years later, the US again was in a financial crisis: losing 30 million jobs, experiencing a 4.3% decline in US GDP, and losing $10 trillion in household wealth.
From both scenarios, we can see a pattern: as there is price instability, the growth of the economy decreases, and there is a higher risk of uncertainty, which causes all the chaos we can imagine.
Returning to the original coinflip scenario, if I were you, I would choose inflation. Here is why: when comparing the above scenarios, I was comparing both hyperinflation and deflation the whole time. Moderate inflation (2-3%) is always the best sign for economic growth because it helps encourage spending, investment, and economic circulation. And why is that? Well, since prices are rising slowly, consumers are motivated to buy products immediately. Then, as demand increases slowly, production also increases, facilitating investment growth and wage adjustments. But still, extreme levels of both inflation and deflation are not opposites in terms of danger. As economies around the world face these shocks, the main thing to focus on is not price movement but the effect on the stability of the overall economy. So, let me rephrase my question. If you had 2 choices, which one would you choose, hyperinflation or deflation (and landing in the middle is not an option!)?
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