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Inflation and Deflation Inflationisacomplexindicatorofeconomicdevelopments.Alongwithitsopposite,deflation,inflationexpresseschangesintheavailabilityofcurrencyand/orthe amountofmoneyneededwithinaneconomy.Iftherearetoomanydollarsinthesystem,salespricesinflatetocompensate—eachdollarbuysyouless.Ifcurrencyisin demand,pricesdeflate—eachdollarisabletobuyyoumore.Whilecontrolledinflationcanhelppreventshort-termshockstotheeconomy,over-inflationcancauses seriousproblemsinlocalmarketsandcangreatlyreducethevalueofpersonalsavings.Deflationtypicallyoccurswhenaprolongedrecessioncausestheeconomyto shrinkrepeatedly.Decreasingpricesencouragepeopletoholdontomoneyandwaitforcheapergoods,causingtheeconomytoshrinkfurther.Thiscyclecanbecomea “deflationaryspiral”andisextremelydangerous. Inflation: Dollars in Exchange Thoughtherearemanyviewsofinflation,onewaytothinkofitisas“dollarpressure”ongoods.A simpleeconomyconsistsofconsumers(whosaveandspend)andbusinessesthattakemoney,grow andpaywagestoworkers.Asmoneyisadded,moredollarsmovethroughthesystem,increasing pressureandcausingpricestoinflate.However,evenifnomoneyisadded,increasedconsumption cansimulateadditionalmoneythroughspeedofitsusealone.This“fast”moneyputspressureon pricesandcanleadtoeconomicbubbles.Inanormalgrowtheconomy,workerwagestendtorise consistently,generatingpredictableinflation. Savedmoneymovesslowly,butinanormaleconomythein-out flowofsavedmoneyequalizes.Manytimes,whentheeconomy slows,thegovernmentwilllowerthefederalborrowingrate, makingcrediteasiertoobtainandsavinglessappealing.As moneydrainsoutofsavings,itfeedsspendingandinvestment, jumpstartingtheeconomy.However,ifratesareloweredand savingsareignoredduringahealthyeconomy,thispracticecan overheattheeconomyandneedlesslydriveupprices. Four Financial Management | (734) 272-4322 | 900 Victors Way, Ste. 240 Ann Arbor, MI 48108 ThisarticlewaswrittenbyAdvicentSolutions,anentityunrelatedtoFourFinancialManagement.Theinformationcontainedinthisarticleisnotintendedtobetax,investment,orlegaladvice, anditmaynotbereliedonforthepurposeofavoidinganytaxpenalties.FourFinancialManagementdoesnotprovidetaxorlegaladvice.Youareencouragedtoconsultwithyourtaxadvisoror attorneyregardingspecifictaxissues.©2013AdvicentSolutions.Allrightsreserved.SecuritiesofferedthroughLPLFinancial|MemberFINRA/SIPC.AdvicentSolutionsandFourFinancial ManagementareseparateentitiesfromLPLFinancial.Contentinthismaterialisforgeneralinformationonlyandnotintendedtoprovidespecificadviceorrecommendationsforanyindividual. Allperformancereferencedishistoricalandisnoguaranteeoffutureresults.Allindicesareunmanagedandmaynotbeinvestedintodirectly.
