What do these terms mean?
Inflation refers to a general rise in the level of prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time. Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentage.
Its opposite is deflation, a general fall in the price level. A reduction in money supply or credit availability is the reason for deflation in most cases. Reduced investment spending by government or individuals may also lead to this situation.
The consequences:
The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country. When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth. A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.
Deflation leads to a problem of increased unemployment due to slack in demand. As prices continue to fall, demand also falls because people stop spending money. The result is a crippled economy.
Financial crisis in the 20th century
The Corona crisis is not the first financial crisis that mankind has had to go through. Already in 1930 there was the first big one. Here, the right reaction was not taken. Prices became cheaper and cheaper and the unemployment rate increased. The income of the companies became less and less. All this resulted in a crippled economy.
We seem to be coping better with the current crisis. But..
Is the great inflation coming?
There is a very high probability that there will be no galloping price increases throughout Europe. For Peter Brezinschek, chief analyst at Raiffeisen Bank International (RBI), for example, there is no threat of inflation or even hyperinflation in sight: "But the times when central banks spoke of an acute risk of deflation are definitely over. The chief economist of the National Bank (OeNB) estimates the "probability that we will see inflation rates significantly above two percent in the next few years" as "very low." At this point, we must note that even the EU is aiming for an annual inflation rate of around 2%.
The state provides security through short-time work and thus demand continues to be maintained. So at the moment, we don't have to fear either major inflation or deflation.
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