homeeconomy NewsInflation, high inflation, hyperinflation, deflation: Know the difference

Inflation, high inflation, hyperinflation, deflation: Know the difference

Inflation, high inflation, hyperinflation, deflation: Know the difference
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By CNBCTV18.com Oct 29, 2021 8:44:36 PM IST (Published)

Hyperinflation is the rapid rise in prices of goods and services, with prices increasing by over 50 percent each month. The sceptics may be off the mark about hyperinflation in the US. However, experts agree that inflation of 3-4 percent by 2022 seems likely.

Jack Dorsey became the latest big name to fan fears of hyperinflation, which were, however, disproved by Cathie Woods, Founder, CEO and CIO of Ark Invest.

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“Hyperinflation is going to change everything. It’s happening,” Dorsey had tweeted on October 23. “It will happen in the US soon, and so the world,” the billionaire added.
But Wood disagreed and countered it with her “velocity still falling” view.
"In 2008-09, when the Fed started quantitative easing, I thought that inflation would take off. I was wrong. Instead, velocity -- the rate at which money turns over per year -- declined, taking away its inflationary sting. Velocity still is falling," Wood said in a tweet.
While experts agree that most nations are experiencing higher consumer prices -- an effect of higher inflation -- here's a closer look at the concepts of hyperinflation, inflation, deflation and stagflation.
What is inflation?
In simple terms, inflation is the rate of increase in the general price level of any economic system. It is calculated by comparing the price of certain goods and commodities like food, energy and fuel each year. Most central banks prefer to have a relatively stable yet positive level of inflation since it is better than the alternative of a recession. A relative level of inflation makes people invest their money in the economy since bank interest rates are low at those low levels.
Inflationary pressure is often caused by high demand and excessive cash in the economy. Many experts believe that current inflationary pressure is due to the fiscal stimuli that have increased the amount of cash while supplies remain low due to global supply breakdowns.
What is hyperinflation?
Hyperinflation is defined as rapid, excessive, and out-of-control general price increases in an economy, usually measuring more than 50 percent rise in prices per month. Venezuela is currently in a state of hyperinflation, with a 3,012 percent inflation rate, while countries like Sudan, Zimbabwe and Lebanon have very high inflation rates as well.
According to studies and research, hyperinflation only occurs in very specific circumstances, including in the aftermath of war, when fiscal authorities lose control; or as a result of populist monetary policies.
Hyperinflation also occurs as a result of a prolonged economic depression. During periods of economic depression, the economy shrinks over a prolonged period, leading to severe levels of unemployment, increased bankruptcies, lower production output, and less available credit.
Central banks and governments, in response to depression, increase the money in circulation. However, if the national economy fails to support the increased supply of credit, hyperinflation can follow.
The recent accommodative fiscal policies of several central banks have sparked fears of hyperinflation for this very reason. However, current economic conditions do not suffer from low production output, rather there is lower supply due to a global supply chain breakdown that is taking longer than expected to recover.
What is deflation?
Deflation is an economic phenomenon where prices of goods quickly decrease due to the low availability of money in the economy and/or increased production of goods far beyond the current demand for them. As a result of deflation, the purchasing power of cash only increases with time and thus people start hoarding money as less and less money makes its way to the economy, which leads to more deflation.
While experts agree that most countries around the world are suffering from inflation currently, Wood believes technological advances can quickly lead to deflation due to decreased production prices.
“Now we believe that three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy. Two sources are secular, or long term, and one is cyclical. Technologically-enabled innovation is deflationary and the most potent source,” she added in her Twitter thread.
Since deflation can quickly lead to depression and recession due to production losses, slow consumption and falling demand for goods and services, banks are careful to keep their economies at a low level of inflation instead.
What is stagflation?
Stagflation is defined by economists as a period of slow economic growth that is characterised by high rates of unemployment while high inflation rates continue to remain prevalent. Situations of stagflation are harder to deal with as policy changes by governments to bring inflation under control often exacerbate the unemployment levels and vice versa.
The phenomenon is also known as recession-inflation. The 1973-1975 economic downturn that finally brought an end to the post-World War II economic boom was a period of economic stagflation.
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