Thursday, June 18, 2009

After Inflation, India stares at deflation

For the first time since the new wholesale price index (WPI) series started in 1995, India’s annual rate of inflation turned negative, falling to minus 1.61 percent for the week ended June 6

Unfortunately, there is nothing to rejoice about this. Deflation is usually linked with severe recessions. The last time the world was in such a situation was in the 1930s and it took sustained government spending in the US and World War II to get out of it.  Deflation is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand.

Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral.

Deflation for many people who have assets in cash, and a regular income is good news. Companies are forced to lower prices, whilst the cost of assets like a home, land, car decrease.

So how do you start benefiting from Deflation?
Make sure you simply save, and go bargain hunting.  The key is a having a steady income, whilst you save to invest in real assets that will become undervalued.

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