The Truth About Inflation and Deflation

There are warnings from the economic forces that we are in a new period of deflation and there needs to be a mindset adjustment to survive financially. The past 20 years or so have been a blessed time where jobs were plentiful, companies sales volumes increased and stock prices rose accordingly. The next several years will be plagued with quite the opposite. In these times of economic contraction what skills do consumers need to stay afloat? First let’s define inflation and deflation.

Inflation is a good and bad thing. The good thing about inflation is that companies are increasing prices because there is a scarcity of goods in the market place (demand is high). With the factory conveyor belt turning faster more employees are needed to process the goods being manufactured. More hiring means more cash streaming into the economy. That seems like a perfect scenario except most times wages do not keep up with rising prices. If you cannot buy enough groceries to feed your family with increased earnings are you truly better off?

Deflation is also a good and bad thing. During times were prices are falling your dollar will go further (you can buy more goods), but at the cost of decreased income. Economic contraction means the factory conveyor belt is turning slower so less employees are needed. If your dollar is buying more, but your wages are less are you truly better off?

The truth about inflation and deflation’s affects are your ability to adjust spending. The mindset for the years ahead is to focus on saving money. Stay away from debt and unnecessary spending across the board. Commodities such as homes, cars and clothes that are currently sold at a premium will adjust down eventually as less are being purchased. In periods of economic contraction cash is king because there is less of it. Unlike times of inflation, in deflationary periods where prices are falling, a penny saved is really a penny saved. If you are a saver the next few years will be a blessed time. Be frugal and your piggy bank will be your new best friend.