What is deflation and why is it important to combat it in time?

The world economy It is something very changing and even unequal, because just as there are countries that do not stop expanding, there are others where gross domestic product (GDP) seems not to hit bottom, putting other factors at risk such as employment, commerce and influence.

One of the most important components of a country’s economy is the consumer price index (CPI), better known as inflation, which influences the value of the goods and services that people have in their daily lives. This indicator, The higher it is, the greater its weight will be in the prices that are handled in the market, making everything more expensive..

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However, there are countries which have managed to control and even reduce inflation in different ways, as long as consumption and purchasing are encouraged, giving greater dynamism to the economy. However, reducing it too much could be counterproductive. Here we explain why.

The phenomenon of continuous price decline is known as deflation and, according to Bank of the Republic“It can be as damaging as uncontrolled inflation because it means the country becomes poorer. It can be caused by a drop in consumption or excess supply, which forces sellers to lower prices.“.

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This, on a large scale, can generate a vicious circle, since it can cause a reduction in spending and investment, leading to less dynamic growth in the economy.as well as an increase in unemployment, as explained by the Bank of Spain.

Deflation

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Taking this into account, companies may face a possible drop in their profits, because people may postpone their expenses, i.e. that consumption would be discouraged.

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“Unlike inflation, deflation makes it more difficult to pay debts by increasing their real burden (that is, the value of these debts in terms of the consumption basket). This could lead families and companies to not be able to meet their obligations.“, declared the Bank of Spain.

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