Economics Learned: Inflation / Deflation

What actually is inflation and deflation?

So TV prices are going down but avocado prices are going up. That must mean that one item reflects deflation and one item reflects inflation. Very simple concept. Not so fast Bunky! Prices can change for all manner of reasons, one of them being a change in the value of your money. However, a price change alone does not imply a change in the value of the currency. Take as an example, when a country institutes or raises its sales tax, the price of goods increase by the amount of the tax. Unfortunately, and almost unbelievably indexes such as the Consumer Price Index will reflect the price rise. This is not a monetary phenomenon- however central bankers (the Fed in particular) have often reacted as if it were by raising rates to head off the dreaded inflationary repercussion. The outcome was always, like now, predictably bad.

Prices differ depending on WHERE something is purchased such as buying canned goods in Maui compared to buying them in Buffalo. Prices change dramatically WHEN things are purchased such as waiting for those after Christmas sales. Of course prices can dramatically change based upon the quantity you buy. A case of tuna fish at Costco’s, when calculated per can, can vary widely from that single can purchased at Safeway. QUANTITY does matter. None of these are a monetary phenomenon nor are they inflationary or deflationary. Additionally commodities can have large nonmonetary price swings, caused by draught, flood, war, or countless other things.

This is It's All About Money newsletter premium content.

To unlock this hidden content, you must login here or Sign up for It's All About Money newsletter.

Written by
With his passion for economics, Bill Tatro has been entertaining audiences on the radio and in seminars for over 30 years. Bill’s dynamic and no nonsense style has made him one of his stations’ most popular show hosts.