Economics 101

The trillions of dollars spent by the government in 2020 to help offset the impacts of the coronavirus pandemic, has raised speculation as to how it will impact the U.S. economy in the short- and long-term. Economists often mention terms such as inflation, deflation, and hyper-inflation. We’ll explain what these terms mean.

Inflation

When too much money chases too few goods, we have inflation. Inflation happens when prices increase due to high demand and either a decrease in supply or a supply that doesn’t keep up with demand.

With the multi-trillion-dollar stimulus packages pumping money into the economy, this new infusion of cash could lead to an increase in demand. Typically, excess money means more people are going to spend. Inflation can be slowed or avoided if the excess money is saved and not spent.

Inflation isn’t entirely bad unless it happens quickly creating hyper-inflation.

Hyper-inflation

When prices of goods and services increase significantly and quickly, hyper-inflation happens. This devalues currency and if severe, some people may trade other things of value instead of currency. This could be livestock, gold or other goods or services that are easily traded.

Hyper-inflation usually results when a government incurs financial or political stress. Wars and declining tax revenue are some of the culprits. Zimbabwe incurred hyper-inflation in the early 2000s when the government printed more and more money in an attempt to finance a war with Congo and meet the demands of high unemployment which decreased tax revenue and consumer demand.

Deflation

The opposite of inflation is deflation. This is when prices decrease usually due to an excess supply of goods and a decreased demand for those goods. Deflation can also happen when there is a decrease in the money supply from a reduction of debt availability (banks aren’t lending or are making it more difficult to obtain a loan) or when there is a cash outflow from an economy (investing in foreign markets instead of domestic investment).

While the U.S. economy remains healthy, understanding these basic economic principles can help you to better understand what economists are saying.