Value Change

Finance, a la shmoop. What is deflation? Alright well let's start with inflation [A football with a pump attached]

and here's the proverbial football we pump as prices go higher and higher [The football getting bigger and starts to shake]

until they can well go no more. But the real world doesn't have to be this [The football explodes]

dramatic in fact prices inflate and deflate in small pieces all the time. The [Graph showing historical inflation rate]

standard terminology for when pricing goes down relative to well everything [2 dollar price tag is replaced with a 1 dollar price tag]

else at least the indices in its past, well that term is deflation. There are

really two types of deflation economists drone on and on about and they come from [Students in class asleep]

very different places. Over here is simply monetary deflation that is the [Types of deflation written on a blackboard]

supply of money, think liquid cash sloshing around in the market places, [Tap running in a basin labelled marketplace]

that money supply declines in monetary deflation. All right so what does that [Money running out of the tap]

mean to the average Joe well it means that wages and money generally go

further in times of deflation like your dollar buys more than a dollar, at least [Someone putting money into their pocket]

what a dollar bought last month or last year. And that's the direct opposite of

what happens in an inflationary environment, got it? [Money disappearing]

So that's monetary deflation but the other flavor of deflation is price

deflation which implies that prices on the basics well are simply going down

driven usually by consumer fear of a bad moon on the horizon, where consumers [Girl looking scared and crying]

simply don't buy things and via lack of demand prices well they just sag into an [Someone putting a bottle of wine back onto a supermarket shelf]

overly supplied abyss and you know the saying life's abyss and then you die you [Price tag flies off a tag]

know that's where it came from. Well alternatively if productivity goes

way up well then consumer purchasing power also goes up with it and then we

likely get inflation, got all that? So this is supply and demand and there's

the graph and when demand goes down supply goes up and prices get weak [Supply and demand graph]

Wifi used to be expensive because the technology to deliver it was really hard [Picture of a complex circuit board]

to build and distribute and have actually work, but then tons of Wi-Fi [The circuit board starts smoking]

devices got out there i.e. there was tons of supply and well now there's Wi-Fi

everywhere and so pricing is cheap if not free pretty much well everywhere so [Wifi symbols popping up all over the world]

think about that as a supply driven deflation and you know Wi-Fi prices [Graph showing price of wifi falling]

they're going down and yeah that's really about it if you were hoping for

more elaborate explanation we're sorry to bust your balloon... [Balloon explodes]