Tuesday, 12 August 2014

What Happened To Freddos Being 10p? Deflation; Part Two


So, in the previous article we looked through the negative effects of inflation- how it can spiral, leave people impoverished, and so on- and we also looked at a positive if you like borrowing.
However, let's talk deflation- the reduction of general prices in the economy.

What causes deflation? It's exactly the opposite of inflation. Inflation is caused by an oversupply of money in the economy- deflation is caused by an undersupply of money. Whereas inflation decreases the value of money, deflation increases it, causing things to become cheaper. Sounds good, right?

There are many consequences of deflation however that can be damaging- profit loss for businesses being the root of the major ones. Dropping prices to an extent are beneficial- it can grant more people access to essentials such as heating, which, as discussed in the previous article, can save lives.

However if deflation gets out of control, falling prices will mean profits of businesses will fall- and thus most businesses will cut down on costs, leading to people being made redundant, factories and offices shutting down, work being outsourced, and so on.
Unemployment would increase, and even those fortunate enough to keep their jobs would see their pay decrease.
Unemployment can be devastating- it would lead many to default on any loans or mortgages taken out, it can cause people to lose their homes (though this is more likely in the USA than the UK).

You may be thinking, why have we heard so much more about inflation in the news than deflation? Well deflation can often be more easily controlled by governing authorities. In the USA, the Fed (the central bank) prevents deflation by flooding the market with money, thus increasing prices. The UK follows a similar protocol- we mentioned previously the idea of Quantitative Easing.

So should we be happy that the price of a Freddo has increased over the past two decades? Not really- but perhaps the fact that it didn't drastically fall in price is something we should also be well aware of.



Mohammad Lone Editor