Inflation vs Deflation: What's the Difference?
Inflation is a general rise in prices; deflation is a general fall in prices. Central banks usually target mild inflation (about 2%) because deflation can trap an economy in falling spending.
| Inflation | Deflation | |
|---|---|---|
| Prices | Rising | Falling |
| Value of cash | Falls | Rises |
| Effect on borrowers | Debt gets easier to repay in real terms | Debt gets harder to repay in real terms |
| Typical cause | Demand outpacing supply, cost shocks, money growth | Weak demand, credit contraction |
| Central bank response | Raise interest rates | Cut rates, quantitative easing |
Bottom line
A little inflation is considered healthy. High inflation erodes savings; persistent deflation discourages spending and investment.
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