How does inflation or deflation affect economic growth?

The impact of inflation and deflation on economic growth can be complex and multifaceted. When evaluating how both phenomena affect economic stability, it is important to consider that both inflation and deflation can lead to negative consequences for economic growth.

Inflation, when moderate, can stimulate economic growth by encouraging spending and investment; however, high inflation can erode purchasing power, create uncertainty, and lead to a decrease in real income. This may subsequently dampen consumer spending and business investment, ultimately slowing down economic growth.

On the other hand, deflation often signals weakening demand in the economy. It can create a cycle where consumers delay purchases in anticipation of lower prices, leading to reduced sales for businesses. Consequently, businesses may cut back on production and investment, which can lead to layoffs and increased unemployment, further deepening the deflationary environment. This cycle can stifle economic growth as both consumer and business confidence decline.

Thus, both inflation and deflation can disrupt economic stability, making it clear why the assertion that both can have detrimental effects on growth is accurate. The presence of either condition can create an unstable economic environment, underscoring the importance of maintaining price stability to support sustainable economic growth.