Saturday, 18 October 2014

Deflation - what is it?

We know what inflation is:- noun

"the action of inflating something or the condition of being inflated"

specifically for economics:-
"a general increase in prices and fall in the purchasing value of money"

At present the "experts" are saying that the Euro zone is struggling with deflation, what is it and how does it affect us?

Definition:- "reduction of the general level of prices in an economy"

Well surely that should be good news, right? Most people are struggling with low pay, no pay rises, higher energy costs and other services, so how come deflation is raising it's head in Europe?

Prices are now rising at the slowest pace since the depths of the global downturn in October 2009, fuelling fears that the region is heading for a disastrous bout of deflation. A number of countries in the Euro zone are already suffering from deflation, including Italy and Spain as well as Greece, Slovenia and Slovakia, as the falling oil price, squeezed pay packets and weak demand take their toll.

Have you noticed in your local petrol station  how the price has been dropping over the past few weeks?

Deflation, or falling prices, can cripple economies because it makes debts harder to service and can lead to businesses and households putting off investment and spending, hitting corporate profits and costing jobs, and this is the reason why the Bank of England has suggested that the base rate will probably not rise from the 0.5% it has been at for the past six years.

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