What Is the Difference Between Inflation and Deflation?

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Inflation means that the value of money decreases, whereas deflation means that the value of money increases. In a period of inflation, the costs of goods and services increases over time. In a period of deflation, the costs of goods and services decreases over time.

The primary concern during inflation is that the price of goods rises relative to the ability of consumers and businesses to pay for them. It is more difficult for the average person to meet basic living needs when inflation is too high. Businesses also have to pay more for goods and services during periods of inflation. Investors tend to look for safer investments, such as gold, during times of inflation. Thus, gold prices tend to rise with inflation. In contrast, rapid inflation hurts more risky investments such as stocks.

Deflation typically means that consumers and businesses pay lower prices for goods as time goes on. While lower prices seem good at the consumer level, businesses may have a more difficult time making profit. Struggling companies don't have the resources to expend, which could hurt employment levels. Deflation also causes investors to pull money from gold and other conservative investments and to put it into devalued investments. This investment strategy can reap rewards since investors might get more value for their money.