Inflation and Deflation Techniques

Inflation refers to the increase in overall prices of goods and services, which reduces money’s purchasing power. Central banks manage inflation through tools like adjusting interest rates—raising them to slow economic activity and curb inflation, or lowering them to stimulate growth. Deflation is the opposite, where prices decline, potentially leading to decreased spending and economic slowdown. To combat deflation, policymakers may lower interest rates or increase money supply, encouraging borrowing and spending to boost economic activity. Both are economic techniques used to maintain stable prices, support growth, and prevent extremes that could harm the economy.