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What Is Negative Inflation?

The Federal Reserve constantly monitors for inflationary risks to the U.S. economy.
Negative inflation increases the value of a currency.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 December 2014
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Negative inflation is an economic phenomenon in which the economy is moving out of an inflationary period and entering into a period where there is less money in circulation. During this period where there is a decrease in the supply of money, the prices of products remain somewhat constant. As a result, there is an increase in the value of that currency that in turn aids in strengthening the position of that money and helping to move the economy away from inflation and back into a balanced status.

While there are some common characteristics shared between negative inflation and deflation, there is one important difference. With a deflationary period, both a decrease in the supply of money and a decrease in prices for consumer goods and services take place. This means that with deflation, the overall economy experiences a decrease. By contrast, a period of negative inflation has little to no effect on prices, only the amount of money that is available to purchase those products. It is possible this to foreshadow an impending period of deflation, since unless the money supply increases, there is a good chance that consumer demands will change and prices will drop as a result of those shifts in demand for various goods and services.

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While negative inflation does bring about an economic shift that may be distressing to some consumers, the positive aspect is that this phenomenon helps to slow and often reverse the progress of inflation. Once an economy moves through the period of negative inflation and into a period of deflation, prices for goods and services also begin to decrease. The price decreases in turn provide consumers with the ability to obtain more products for the same amount of money.

There is a great deal of confusion when it comes to negative inflation and deflation. Some economists consider the two terms to be more or less interchangeable, while others draw a slight distinction between the two. This has led some to consider both negative inflation and deflation two phases of a single economic phenomenon rather than two distinct events that occur as a logical movement within an economy. With this approach, negative inflation is seen as the first step towards a complete deflation in the economy, since the decrease in the money supply impacts how consumers spend the money they have available. In turn, the change in money supply leads to the next phase where the prices charged for different goods and services are affected, especially the prices of products that are considered luxuries rather than necessities.

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Post 1

It is difficult to see how negative inflation could be positive for the economy as a whole.

In the most recent recession, lenders were only giving mortgages to the most qualified borrowers.

Yes, interest rates were low and home prices were low, as well, but that did not matter much when so few loans were available to buy them.

That phenomenon needed to correct itself before consumers had the confidence to and were able to purchase homes again, albeit at increased prices.

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