Released October 19, 2009
RALEIGH, N.C. -- Both inflation and deflation have been in the news recently, and it seems like analysts alternate between worrying about one or the other. Give us definitions of inflation and deflation, and tell us which is worse?
Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:
"If you watch financial news programs, it is amazing. One analyst will be worrying about inflation. The other analyst will be worrying about deflation.
Simply put, inflation means average prices are going up. Deflation means average prices are going down. both can be a problem, actually.
High inflation obviously can hurt people whose wages don't keep up, think of the late 1970s, early 1980s. Also, high inflation tends to push interest rates up. For example, in the early 1980s, we had mortgage rates of about 17 percent. So it means people have a hard time borrowing money to buy things like a house or a car.
On the other hand, deflation can be bad because ultimately - and we've had experience with this during the 1930s - ultimately it means wages are going to be pushed down. And also, if you have debt that's denominated in a certain dollar amount, it actually makes that debt relatively more expensive.
I think the bottom line here is that economists have decided that probably what's best for most people and most parts of the economy is to have moderate levels of inflation, somewhere between 1 and 3 percent a year."
--30--
http://www.ncsu.edu/project/calscommblogs/news/archives/2009/10/economic_perspe_471.html
