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Inflationary vs. Deflationary Concerns


Fluctuations are an inevitable and important reality of human life and our social constructs; economics and finance are no exception. Whether it is for political, social or basic economic reasons, the overall prices of goods and services can soar to dizzying heights or plunge to jaw-dropping lows. This is the main distinction between the concepts of inflation and deflation. Each of these economic occurrences can have substantial aftermaths, and while they both impact the entire economy or economies in which they’re taking place, there are specific parties that are impacted in unique ways. 

Ontario-based investor Yelian Garcia has great technical knowledge of the relevant details behind inflationary/deflationary dynamics and is happy to share such knowledge. 

Inflation: 

Savers and lenders are two primary groups of economic agents that are directly impacted by inflation. In the case of savers, such as everyday people in the middle class, an increase in price of goods and services means the value of their savings is eroded away such that living standards may decline significantly by the time such savings are put to use.  In the present time frame however, inflation means nominally more money goes towards current necessities and there is less nominal money left for savings, which compounds the problem. The cost of living includes food, gas, rent and other daily necessities. Inflation favors borrowers at the expense of lenders as the borrower gets to pay back in cheaper dollars. Lenders are often forced to increase interest rates to compensate them for the inflationary risk. Inflation causes all sorts of price distortions which create havoc for the market economy. Yelian Garcia advises you to be increasingly aware of the saver and lender dynamic during a period of high inflation, as it is sure to be one of the most noteworthy relationships during such times.

Deflation: 

In the case of a deflationary period, prices go down which seems like a good thing at first glance. Yelian Garcia explains that while deflation can seem like a good idea it has lots of negative macroeconomic effects. Deflation decreases corporate profits which leads to lay-offs, the employment rate climbs up, which leaves consumers with little confidence which drives prices lower and so the deflationary cycle continues. Deflation favors creditors just like inflation favors borrowers. Deflation is also much harder to fight than inflation from a central bank perspective (The Bank of Japan has been fighting deflation since the very late 90s).

The last big deflationary cycle in North America was the great depression which also claimed its own ‘lost decade’. 

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