What does deflation and stagflation mean?

Inflation, with all its consequences and problems, is likely to be one of the topics receiving strong global attention this year. But two other conditions are equally counterproductive for consumers and the economy. These are called deflation and stagflation, and exactly these I would like to explain to you in this blog post.

The optimal situation is a slight inflation of about 2% because this stimulates the economy, allows it to grow, and the devaluation of money is acceptable.

Let’s start with the question: What is deflation?

Deflation is the opposite of inflation; there is not too much demand and too little supply, which causes prices to rise, but there is too much supply and too little demand, which means that prices fall.

You might think that price cuts are significant because everything becomes cheaper. This is an excellent thing in the short term, but if deflation lasts too long, some problems will arise.

Due to falling prices, companies produce less, which automatically results in these companies earning less and thus having to cut wages and lay off employees to save money. Due to the low profits of the companies and the lowered wages, the state also receives significantly fewer tax payments, so savings must also be made in state investments.

This again leads to lower demand, and thus prices fall further. If this scenario continues for too long and becomes more and more pronounced, an economic crisis will inevitably result.

But what are the actual causes of deflation?

When, for various reasons, the economy weakens, most people begin to save money as they anticipate salary reductions or even layoffs. This restricts consumption and reduces demand for services and goods, which, as we learned earlier, leads to falling prices.

In addition, the appreciation of a country’s currency or falling export demand can lead to deflation.

Now you know what deflation is and what its effects are. Now let’s move on to stagflation.

The term stagflation is made up of the two words stagnation and inflation and that is exactly what stagflation is, a stagnant economy that is not growing with persistently high inflation.

Stagflation usually occurs in periods of crisis when there is a supply shock of raw materials and energy. As a result, companies reduce their production, which reduces supply, and inflation occurs if demand remains the same. By reducing production, however, the economy stops growing or even shrinks, bringing the economy into stagnation and resulting in stagflation.

As will become apparent after this video, these different scenarios often have a negative impact on your assets, income, and savings. This is where JAVLIS can help you because JAVLIS generates a reliable cash flow on your capital, no matter what phase we are in, so you, too, can get through the difficult times of high inflation, stagflation, and deflation.