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What is the difference between inflation & deflation?

Put simply, inflation is when prices rise. The result is that money loses its value. Deflation is when prices go down and money increases its relative value. 

Financial historian Amity Shales summarises the issues
Deflation ... hurts good people, strivers who over-borrow. {It} can cause depressions, as the U.S. saw in the early 1930s ... In the Great Depression, there wasn’t enough money around -- literally. Lacking cash, banks collapsed, and good people did lose homes or farms. More banks collapsed.
{But}..... Deflation doesn’t always spell apocalypse. It can coexist with prosperity -- or even perpetuate it. There was deflation in the 1920s. Prices fell in 1923, and 1925 through 1928. The money shortage hit one sector, farming, hard. 
Overall, the economy grew. Unemployment stayed low. Vigilance on inflation kept prices stable. Stable prices made life easier. For example Harvard’s tuition stood at the same level, $150, between 1870 and the beginning of World War II.

And when prices are rising? How bad can it get? 

The most famous example is Germany's hyper-inflation of 1923. We often hear about customers taking wheelbarrows of money to the supermarket. But what was the effect on the German equivalent of Harvard University? 
The Department of Canonical Law at the University of Munich had a budget of 2,000 marks in 1922. Yet the subscription price for a single scholarly journal was already 10,000 marks. 
In other words the college did not have the money to buy a copy of its own magazine!
So that's why those meetings of the Federal Reserve, the Bank of England and the European Central Bank are so important. They must decide whether to put up interest rates (to control inflation) or down (to avoid possible deflation)  


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