The Basic Principles of Inflation and Deflation

In an economy like the United Kingdom, inflation is a very worrying term. Worrying, because this means that all the money a person saved in a bank is gradually decreasing in value. Add to this the decreasing interest rates to help grow the different sectors of the UK industry, and you have yourself some big trouble.

However, both inflation and deflation have something to do with the maintenance of the UK economy. 

Inflation increases the value and price of things while lowering the power of the sterling. Deflation is increasing the power of the sterling, but decreasing the development and growth of business, infrastructures and others.

The United Kingdom has the UK Treasury, which oversees the printing and production of currencies circulating in the United Kingdom. The UK Sterling is a fiat currency in itself.

A fiat currency is one where the government and other parties have very slight influence over the frequency the UK Treasury produces currencies. The Treasury must ensure that the currencies circulating in the country are not inducing any inflation or deflation.

In reality, the Treasury’s goal is to find the “sweet spot” that would enable good economic growth while retaining the power of the sterling in the UK. In this way the economy can flourish while its citizens are encouraged to spend just enough from their personal savings accounts.