👨🎓 Inflation and deflation - understanding the two sides
👨🎓 Inflation and deflation - understanding the two sides
**6/52** Macro Mornings Education
New here? This is part of a 52-week series on macroeconomics designed to build your knowledge step by step. Feel free to catch up on previous emails here if you'd like to start from the beginning!
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Hi everyone,
Today, we’re going to explore two critical concepts in macroeconomics - inflation and deflation.
Understanding these can help you protect your wealth and make smarter financial decisions.
Inflation
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. , if the inflation rate is 3% per year, a product that costs $100 today will cost $103 next year.
Over time, this can significantly reduce the value of your money if your income doesn’t keep up with rising prices.
A practical example: Let’s say you have $10,000 in a savings account that earns 1% interest annually.
If inflation is 2%, your purchasing power actually decreases over time.
After a year, you’ll have $10,100 in your account, but you’ll need $10,200 to buy what you could have bought with $10,000 the previous year.
Deflation
Deflation, on the other hand, is the decrease in the general price level of goods and services.
While this might sound good - prices going down! - deflation can be harmful to the economy.
When prices fall, consumers may delay purchases in anticipation of even lower prices, leading to reduced demand, lower production, and ultimately, higher unemployment.
For example, during the Great Depression of the 1930s, deflation led to a severe economic downturn, with prices falling by nearly 10% per year and unemployment soaring.
Both inflation and deflation can significantly impact your finances.
Inflation erodes your savings, while deflation can lead to economic stagnation and job losses.
That’s why it’s crucial to monitor these trends and adjust your financial strategy accordingly.
In our next email, we’ll dive deeper into the causes of inflation and how you can protect your purchasing power.
Alessandro
Founder of Macro Mornings