I like deflation and so should you!!

Well the news of India hitting sub zero inflation or more technically a deflation has been making rounds. The general sentiment around this news is negative, implying that its not a good thing to happen.
Before going further lets explore the economic definition of deflation.
In economics, deflation is a sustained decrease in the general price level of goods and services resulting in an increase in the real value of money — a negative inflation rate.
Now that sounds good. I definitely want the value of my money to increase and would be happy if i could buy things at a cheaper price. So why are people not happy about hitting deflation?
Well the real worry is that theoretically deflation is caused by fall in demand and in turn results in lower demand as buyers wait on the sidelines before committing to a new purchase thereby causing a deflationary spiral.
Before going any further lets see what is inflation and how is the inflationary figure calculated. Inflation is the increase in prices of a basket of goods over a period of time. So something that cost ed 100 units of currency costs 103 after a time period indicating that their is more demand than what supply can keep up with and purchasers are willing to pay more. This is technically supposed to prompt investment to increase supply.
Let me ask you this – what is the objective of increasing supply efficiencies? Simplistically speaking – to ensure there is enough goods that can satisfy the demand. If the demand matches supply then theoretically there should be zero inflation. So what growth is really aiming at is to eliminate inflation.
Looking back at historical data prices of a lot of goods have fallen absolute basis as efficiencies increased thereby prompting growth.
One classic example would be computers – just a few years back a PC with 1/10th the power costed around the same price as today. Same with medicines.
So I think deflation once a while is a good thing. It improves the purchasing power of money.

I like my groceries, cars,  ipod’s,  jewellary cheap and the house at an affordable rate (bet you do too!!).
So feel good that we are headed for a deflation and lets hope its not a deflationary spiral but just an adjustment of suppy, demand and prices.

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6 thoughts on “I like deflation and so should you!!”

  1. Well as pointed above lets hope its not a deflationary spiral which can cause a depression, but just a re adjustment of price levels

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  2. Really good read. But I feel too much of deflation can hit economy on the other side. Industries shutting done, more uneployment etc are more killing & bad…. than a decent inflation over a period of time.. Wht’s is your view?

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  3. Although its may be a short term thing, it is a piece of good news. Reading your article puts a smile on my face, it is the first time i since the financial crisis that i hear a piece of happy financial news!

    Keep it up!

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  4. Deflation is good news but it is not self sustaining as there will be less incentive to improve supply efficiency. Hence, I view it more as a very short term technical adjustment.

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  5. Unfortunately in India deflation is only at whole sale price level and not at retail price level.. Experts believe that at retail price level, you still have inflation .. India is the only country in world which follows wholesale price index NOT retail price index..

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