Defining deflation

by Natalie MacLellan on November 30, 2010

in In the News

Last week we discussed inflation and its consequences for investors. Deflation is the opposite of inflation, and describes a decrease in the general price of goods and services (not to be confused with disinflation, a slow-down in the inflation rate – for example, inflation falling from two per cent to one and a half per cent.

Deflation increases he purchasing power of your money, allowing you buy more goods with the same amount of money over time. A piece of gum that costs $1 this year will cost only 95 cents next year, with five per cent deflation.

Well… lower prices are good, aren’t they? Why wouldn’t the Bank of Canada aim a steady rate of deflation, rather than its current target of two per cent inflation? At fist glance this may seem confusing, but think about more than the cost of goods at the till. When prices fall, so do company profits. This can lead to factory closures and unemployment, which then lead to companies and individuals defaulting on loans. Not very good after all.

As an investor, deflation initially allow for buying stocks at lower prices, but over time, deflation falling profits are not good for the markets.

Related posts:

  1. Inflation: what’s the big deal? Today, the Globe and Mail reported that inflation in Canada...
  2. How is inflation managed? Digging a little deeper into the issue of inflation, today...
  3. This week in investing and personal finance Yesterday was Thanksgiving in the United States, making today Black...
  4. Fixed income securities When you buy a bond or other fixed income security,...
  5. Investing for Retirement 2: What exactly is an RRSP, anyway? Before I go any further in blogging about RRSP deadlines...

Share & Bookmark This Story!

{ 0 comments… add one now }

Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Previous post: This week in investing and personal finance

Next post: Mint.com comes to Canada