Inflation or deflation?

02/04/2014 | Estefania Alcocer Marquina (Alumna UC)

What is inflation?
It is a price increase of goods and services over a period of time, from an economic point of view. Another definition could be the decrease of the monetary value referring to the quantity of goods and services that you could buy with this money. For example, a train service; if the ticket prices from Santander to Madrid increase over a period of time, there is inflation.

Inflation in Spain
In order to control inflation, we have to measure it, so how we do that? The answer is Consumer Price Index (CPI); it indicates the variation of average prices in a basket of goods and services for a normal consumer.

Inflation can be provoked by various factors, but the main ones are: demand inflation and cost inflation. Demand inflation happens when demand for a good increases faster than the supply and the productive sector can´t adapt itself quickly enough. Cost inflation is when the production costs increase, for example: when the raw materials price increases and the companies increase the prices of their goods.

Deflation
It´s the opposite of inflation, it occurs when inflation is under 0%. Deflation allows us to buy more goods and services with the same amount of money over a period of time. However, it usually puts downward pressure on prices making things very difficult for businesses and, in the medium-run; this also creates downward pressure on salaries and makes it very hard for an economy to grow.

In conclusion, I think that the inflation should increase a little every year because if it increases a lot every year, it will cause serious economic problems. If there is deflation, the economic problems will get worse because the prices of goods and services will decrease and people will wait longer to buy goods (their demand is affected by their expectations). For this reason, companies won´t earn money and will tend to decrease salaries so they don´t go bankrupt, thereby creating unemployment.

Nota: Este artículo ha sido elaborado por Estefania Alcocer Marquina, alumna de la Universidad de Cantabria, como una de las actividades enmarcadas dentro del programa de capacitación lingüística, dando su permiso para la publicación del mismo en FxM Noticias/OIE24 News.