Inflation and deflation are commonly misunderstood concepts that are actually not that difficult to comprehend. They are a very important factor in the development of economic policies and are vital to traders; both inflation and deflation have tremendous knock-on effects that carry on into all the securities traded daily, so a rudimentary understanding of how they work is essential. This is even more pronounced in the trading of binary options. Binary options tend to be shorter term investments than other trading vehicles so it is very important for binary traders to know the lay of the land, economically, as the right word from the right central banker can really cause the asset your trading on to move. Before you commit to that trade you should probably know what they are talking about.
Okay let's make this really nice and simple. Inflation takes place when there is more money and available credit in an economy than there are goods and services. Conversely, deflation is when there is less money in circulation than the available goods and services. As you can already see, although they are opposites one is not the good term and the other the bad. They both mean bad times for the fortunes of a country and its people. What is desirable is a sweet spot in between the two. Monetary policy is essentially geared towards achieving this sweet spot, with most central banks aiming at keeping inflation somewhere around 2-3%.
When an economy is experiencing inflation the price of goods and services go up. Generally when this takes place businesses may perform well due to increased profit margins, but this effect is short-lived as consumers' spending power decreases, and the cost of borrowing goes up. Also the economy's currency tends to drop in value due to the country or region becoming less attractive to foreign investors. If this dampening of investment carries on for long a nation's productivity will also tend to wane
Deflation isn't any better, in fact unimpeded inflation can lead to deflation as ever-increasing prices cause consumers to purchase less and save more. The effects of deflation are actually worse and even harder to mitigate than those of inflation. In times of deflation a country's economy grinds to a halt. Investment decreases, profits plummet and unemployment tends to rise.
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.