While all somehow related, each of these have their own unique features and distinctions. This article will go into the specifics of each of these economic concepts.
Inflation and deflation are two sides of the same coin. The former happens when the prices of goods and services rise. When they drop, you have the latter. It’s quite a delicate balance between these two economic conditions and it’s very easy to switch from one to the other and back again.
Inflation occurs when there is high demand for goods and services. It is a quantitative measure of the rate, at which prices are increasing. The reason for high demand is separate from inflation itself. It can be attributed to a real estate boom, for example. Producers start charging more for their goods because consumers are willing to pay more for them.
The consumer price index (CPI) growth rate is the most common measure of inflation. In theory, this is like a basket of goods and services, including transport costs and medical care. To gain an understanding of the respective domestic currency’s buying power, governments track the price of the goods and services.
Like they can increase, prices of goods and service can drop. This is when there is less money in circulation or there are too many items available for purchase. You see how easy it is to go from inflation to deflation. You have high demand for real estate, for example, and more and more buildings are being erected, effectively mushrooming. At one point, there are just too many and not enough people willing to buy. Then, the builders will start lowering prices because they have nothing to gain by holding on to the properties. They’re losing money from that. We’ve seen this time and again, in many countries around the world. Spain and the US were prominent examples from about a decade back.
Real estate isn’t the only segment that can be affected, of course. It’s also possible in car manufacturing. Let’s say a certain type of car is really popular, so other producers start making a similar one. At one point, the company might have more of that type than there’s demand for. They are compelled to reduce the price to sell it. It’s bad for a company to end up with too many items in stock, no matter what kind. This can result in layoffs. An unemployed person’s buying power decreases, so with very high unemployment, producers have to cut prices to get people to buy, effectively continuing the trend.
If left to develop unbridled, deflation can lead to recession, then depression. Normally, national banks will make efforts to impede deflation before it develops further. What’s more, loan providers will start giving out less money when they detect a decrease in prices. Then, some consumers are unable to buy expensive things, which creates a credit crunch. Companies are left with surplus stock, leading deflation to become more pronounced.
Stagnation can be viewed as the middle ground between inflation and deflation, although that risks oversimplifying things. It is a prolonged period of very little to no economic growth. Typically, stagnation is defined as economic growth of less than 2% a year. It’s typified by periods of part-time employment (not voluntary) and high unemployment rates. Stagnation can occur on a smaller scale in certain companies or sectors or on a macroeconomic scale. It can be part of a long-term structural condition of the economy or a temporary condition, such as temporary economic issues or a growth recession, which is where fewer jobs are being added than lost because the economy is growing at too slow a pace.
Shrinkflation is different from inflation in that producers don’t increase the price of an item. Instead, they reduce the size. Companies increase the price per given amount to achieve a clandestine boost of profit. This is typical of businesses in the food and beverage industries. This way, the term “shrinkflation” becomes a combination of two different words. Inflation denotes the price increase, while the “shrink” part indicates a change in product size.
Finally, hyperinflation describes unbridled, excessive, and rapid price increases, typically limited to one country although neighboring ones and trade partners will obviously be affected. It is defined as an inflation rate where prices are rising by more than 20% a day or 50% per month. Developed economics are more rarely affected by it. There have been examples of extreme hyperinflation in history, however: Germany, Hungary, Ukraine, Bulgaria, Greece, Zimbabwe, and other countries have experienced it. This article will end with some examples.
Hyperinflation can happen in the context of severe economic issues or in times of war. The central bank will print an excessive amount of money in an attempt to cope. Basic goods like fuel and food become in extremely high demand because hyperinflation causes a surge in their prices. Hyperinflation is quick to spiral out of control.
Extreme cases of hyperinflation
Two extreme cases of hyperinflation in history occurred in Germany in 1923 and in Hungary in 1946. In Germany, monthly inflation reached 29,500% and prices doubled every four days on average. 1923 was the last year, in which the Weimar Republic existed. The daily inflation rate was 21%. When WWI broke out in 1939, the country’s national currency, the Deutsche Mark, was exchanged at a rate of 4.2 per US dollar. In comparison, the rate was up to 1 million per US dollar in August 1923.
However, this pales compared to what Hungary experienced in 1946. The European country has had the worst hyperinflation in history to date. It reached 13,600,000,000,000,000% per month and prices doubled every 16 hours. In the middle of 1946, Hungary had a bill of 100,000,000,000,000,000,000 pengo, equivalent to a hundred quintillion. In comparison, the bill with the highest denomination was 1,000 pengo just two years earlier. When inflation peaked in Hungary, the daily inflation rate was believed to be around 200 percent, and the monthly one – 13.6 quadrillion percent.