Deflation-Inflation Game

I got up in the morning, and was following my routine i.e with my daily cup of green tea, reading newspaper. First word which I read for the day was. "Deflation". This is my first encounter with this word so I tried to think the meaning of this word in my mind, then I found the definition there itself. I would like you to read trhe definition from TOI.

"A persistent decrease in general price of goods & services. It occurs when the inflation rate falls below zero and stays there for a sustained period"

After reading it, my mind went in the past, somewhere around 6 months back when we used to read one word called "Inflation" everyday. I know what Inflation is, but what is this Deflation now, and why there is so much of cry on this.

When I completed the Article then I got my answers. Let me tell you, Deflation is the reverse of Inflation, when prices are keep on falling and people are not buying the stuff in hopes to fall prices further. Seems weird but true. Then I started thinking when Inflation was going high people had problem, now when it is coming down(deflation is called negative inflation) then also we have problem. I was not able to sort this out.

I fully read(actually again read it) the article and started analyzing it. The fear is when people are not buying the commodities even when the prices are coming down then it create some kind of collapse in Demand so that means Inflation is not coming down due to improving economy but it is coming down bcoz of fall in demand. It is but obvious when customer won't buy something the market has to reduce the prices further.

Ultimately it is going to effect our Economy in no good manner. It will reduce the purchasing power and Investment as customers are not willing to spend. It will create a kind of 'Deadlock' in the market, it will be a weird scenario. There is particular word used for this situation called "deflationary spiral, or vicious cycle". As the prices are falling and customers are not buying in hope for further decrease so it results in low productions which further will cause low wages and demand, ultimately to meet all these, reduction in prices. Which creates a DeadLok. Sometimes this lasts very long, Japan has suffered this for almost a whole decade. It started there in early 1990's and things came to normal only after a decade. Generally this kind of Decade is called "THE LOST DECADE"

What should a common man should do in this scenario. First thing we start investing. Look for companies whose sales are not affected much by prices, like gaints in consumer goods, healthcare and utilities Companies which can counter lower prices through higher value added products or greater economies of scale Firms with low levels of debt. Companies which had earlier taken heavy debt at high rates see their real cost of debt soar during deflation.

specially when we are already fighting with the Recession, we should take our steps very carefully. We are not in a state to handle any mistakes so I think the best way to beat this is to take the collaborative steps and majors. First thing is remove the fear from the markets. Recession is not so big but we have made it big by having so much discussions around it and daily having leangthy articles and discussions over it. When everybody will talk about it then obviously people will get concious and it will restrict therir steps like investment etc, which in the long run are going to affect our economy badly.

When people will stop investing in the markets due to fear then how can we recover from this phase. Actually Business is all about Trust, if we have lost trust for the market then doing the business is impossible, so we should remove the fear and start building Trust so that markets will get some cash/funding and start recovering and people start doing business again.

We should also improve our purchasing habits. In this kind of scenario customers will restrict his/her hand while buying the daily commodities. Previously they used to buy in bulk and store it now due to continuous fall in prices they are buying as per the needs which ultimately encourage Deflation.

I conclude this discussion with hopes to control this game of Inflation and deflation and to get the strong hold of Indian Economy.

Love,
Mayank