Inflation vs. Deflation: What's the Difference?
Inflation and deflation are opposite movements in the general price level. Inflation is when prices rise over time and money buys less; deflation is when prices fall and money buys more. Both can be harmful in the extreme.
See the difference, explained visually.
Watch a 2-minute animated lesson comparing inflation and deflation.
At a glance
| Inflation | Deflation | |
|---|---|---|
| Prices | Rising | Falling |
| Money's value | Buys less over time | Buys more over time |
| Typical cause | Demand or money supply outpacing goods | Falling demand, shrinking money supply |
| Risk if extreme | Erodes savings; hyperinflation | Spending freezes; downturn spiral |
| Central bank aim | Keep it low and stable | Avoid it; push prices back up |
Which should you use?
Inflation
Inflation is the more common condition; central banks usually aim for a low, steady rate (often around 2%).
Deflation
Deflation is rarer but dangerous — when people delay spending expecting lower prices, it can deepen downturns.
Frequently asked questions
- Is deflation good because things get cheaper?
- Not usually. Mild falling prices sound nice, but deflation often makes people delay purchases, so businesses earn less and cut wages and jobs — a damaging spiral.
- What causes inflation versus deflation?
- Inflation usually comes from demand or money supply outpacing available goods; deflation from falling demand or a shrinking money supply. Central banks try to keep prices stable.
- Which is worse?
- Both are harmful in the extreme. High inflation erodes savings; deflation can freeze spending and deepen recessions. Economists generally prefer low, stable inflation.