Inflation – Effect of Negative Inflation on our Pockets and Economy

Definition of Inflation

Inflation is a period in which sustained, and an overall increase in prices, costs of goods, and services seem to harm consumers’ purchasing power.

In other words, inflation is the fall in market value, often accompanied by a national currency’s devaluation.

It is famous as a distinct and independent processes.

The persistence of inflation can occur over a few months, years, or even decades.

They are often common scenarios in many countries of the world due to the fluctuation of world economies.

Negative Inflation

• Negative inflation is usually a temporary decrease in the HICP due to a drop in goods and services.
• Costs of goods such as fuels, perishable consumer goods, or others are compared to their costs a year earlier.
• A year ago, alarms sounded in the evolution of prices.
• Inflation remained flat until it entered negative territory. This scenario influences our pockets.
• The confirmation that inflation continues to be negative at the start of the year raises many doubts about its consequences on the real economy.

Deflation

• A prolonged period of generalized price decline is called Deflation. Experts acknowledge that there is a drop in prices and that it is widespread.
• On the other hand, they disagree that it will continue over time.
• The consumption indicators show that families do not delay purchasing decisions expecting a further drop in prices.

Direct consequences of Negative Inflation

On Families

• They have a higher income. The family income is the money they enter via wages or rents.
• A part of that income is intended for savings and another for consumption.
• If the products’ prices are lower (as in gasoline), families release payment that they can use to consume other products or save.

On companies

• The fall in the prices of certain primary products for business activities such as oil makes it possible to lower production costs.
• Again, in that circumstance, companies can make two decisions with these savings: increase investment or increase profits.

On pensions

• No, reforms approved by the Government, the revaluation of pensions is separated from CPI and is calculated based on the system’s income and expenses.
• So if the current negative inflation situation is to preserve throughout the year, next year’s pension increase would be 0.25%.

On salaries

• No, Since the crisis began, most companies have decoupled wages from the CPI.
• So that in the last years in which the CPI was positive, there was a general drop in wages.
• Therefore, the current fall in prices will not cause them to continue falling.
• In the negotiations that unions and employers held, the agreed increase recommended in the Covenant of Agreements would be around 1%.

What are the main negative consequences of negative inflation?

• Although the economy is not in Deflation, it does have a higher risk of being so in the short term when inflation is negative.
• Another consequence is that the debt-to-GDP ratio may grow: if prices theoretically drop, GDP would fall while the debt would remain stable.

Shopping basket

• Buying is cheaper. This last year, what has fallen most in price are unprocessed food and energy prices, highly influenced by the international context.
• In other words, everything is related to fuels, electricity, gas.
• Expenses for telecommunications have also fallen. Although, so far this year, oil has begun to recover.

Purchasing power

• In an environment of freezing and lower wages, prices have remained at negative rates, have allowed us not to lose purchasing power but even to win.

Savings products

• With inflation at negative rates, the impact on savings is positive since no depreciation of the profitability is generated.
• Let’s imagine, on the contrary, that we have inflation of 2%.
• To know exactly the benefits that our savings create, we would have to discount that 2%, so the profits will be
  lower.
• Seen in another way, if the profitability of the product we are investing is 3% and inflation is 2%, my investment’s real interest is 1%.
• In contrast, if inflation is negative, the latest data is -0.2%, the genuine interest on the deposit is 3.2%.

The ghost of Deflation

• Over the months, experts have ruled out this pernicious scenario.
• It is a general and prolonged fall in prices over time that leads consumers not to spend in the expectation of a further drop in prices.
• In recent months, the recovery in fuel prices has prevented Deflation.

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