Inflation and deflation are both economic terms that describe changes in the general price level of goods and services in an economy. They represent opposite movements and have different implications for the overall economy. Central banks of countries are constantly intervening (Refer to Figure – 3.1) to control inflation as well as deflation to maintain price stability.

What is Inflation?

Whenever the overall price of products and services rises, it is claimed that inflation is rising as well. It measures how much the normal rate of prices on goods and services increases over spending over a certain time. When we have too much money chasing fewer goods and services, it is a symptom of inflation. Often Central banks intervene to avoid an extreme increase in inflation, because as the cost of goods and services rises, so does the value and the purchasing power of the currency fall. That means consumers and businesses can purchase a few since the rice. All central banks of the world have a mandate to keep the inflation level at a certain level. For Forex trading commonly inflation is assessed by economic indicators such as the consumer price index (CPI) and the Producer price index (PPI).

Major Causes of Inflation:–

1. Increase in the money supply:-

If the amount of money in circulation increases faster than the production of goods and services, it can lead to inflation.

2. Demand-pull inflation:-

When aggregate demand in an economy outpaces the supply of goods and services, it can result in inflation as consumers compete for limited resources.

3. Cost-push inflation:-

If the production costs for businesses increase, they may pass on those costs to consumers in the form of higher prices, leading to inflation.

Major Effects of Inflation:–

1. Reduced purchasing power:-

As prices rise, consumers may find it more difficult to afford the same quantity of goods and services.

2. Income redistribution:–

Inflation can affect different individuals and groups in various ways, redistributing purchasing power between borrowers and lenders or between fixed-income earners and others.

3. Uncertainty:-

High inflation can create uncertainty in the economy, making it challenging for businesses and individuals to plan for the future.

What is Deflation?

Logically, deflation is the opposite of inflation it happens when prices of goods and services are falling. Deflation is when too little money is chasing too many goods and services. At times, deflationary forces can hit the labor market fairly hard by increasing the unemployment level as the overall demand in the economy decreases. On the other hand, deflation makes it more affordable to struggling consumers items such as food, fuel, and core consumable items. Deflation is less common than inflation and can have significant impacts on the economy.

Major Causes of Deflation:

1. Decrease in the money supply:-

If the money supply decreases or if there is a decrease in the velocity of money (the rate at which money circulates in the economy), it can lead to deflation.

2. Decrease in aggregate demand:-

When consumer spending declines, businesses may lower prices to stimulate demand, resulting in deflation.

3. Technological advancements:-

Rapid advancements in technology can lead to increased productivity and lower production costs, causing prices to fall.

Major Effects of Deflation:–

1. Increased purchasing power:–

Falling prices mean that consumers can buy more goods and services with the same amount of money.

2. Delayed spending:–

When consumers expect prices to continue falling, they may delay purchases, leading to reduced demand and potentially harming the economy.

It’s important to know that moderate inflation is generally considered desirable for economic health, as it indicates a growing economy. On the other hand, deflation can be a sign of economic slowdown or recession and is often seen as undesirable.

I hope this article is helpful for you to understand Inflation and deflation in the economy.

Stay tuned to our website for more tutorials about Forex Market. If you have any suggestions or queries, feel free to Contact us or drop your message in the comment section below.

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It is not enough to learn about economic indicators when you are trading in the Forex market. Before you get into the market moving indicators, it is important to understand the mandates of the different worldwide central banks and their roles. Worldwide central banks will impact the currency you are trading because they will tremendously impact the sentiment just with a change of interest rate decision or monetary policy decision or any central bank intervention to the Forex market.

You will lose money in the long term if you skip learning about any important currency market drivers. So you have to learn all the fundamental facts around the world. I know it is not very simple, and that’s why most retail traders are ignoring this stuff of trading. Believe us if you take a keen interest in it we are there to make you a successful trader and you will definitely become a master of fundamental analysis along with technical analysis.

While different central banks have different mandates, they have a couple of functions in common. Central banks are known as the lenders of last resort. Because aside from being responsible for regulating the country’s money supply through monetary policy tools, they can lend money to commercial banks, especially during financial crises or tight banking conditions.

In the world of central banks, there is a certain phrase that is commonly used to describe the actions of central bankers and their outlook for interest. There are a few examples below:

Hawkish:–

Central bank’s bias toward increasing interest rates due to the country’s economy growing too fast or inflation rising or the need to hike the value of domestic currency etc. Remember these all economic indicators are linked to each other by the way.

Dovish:–

Central bank’s bias towards cutting interest rates due to the concern that the economy is slowing down too fast or deflation is rising or the need to decrease the value of domestic currency etc.

Central Bank Intervention:–

Action taken by central banks to induce movement in currency rates is known as central bank intervention. For export-driven countries, their central banks will intervene more often to keep exports competitive.

Now I discuss below several central banks in the world which is much effective for the Forex market:

U.S Federal Reserve (Fed):–

Currency: USD

The federal reserve, in short, the Fed is the central bank of the united states. The FOMC (Federal Open Market Committee) Fed funds rate should be taken note of, especially for traders who are trading the USD pairs. FOMC comprises 12 members and has the right to determine the interest rate of the USA.

The Fed’s key mandate is to ensure maximum employment and maintain inflation rates at 2% and maintain economic growth at a desirable rate. The Fed is also responsible determine the reserve ratio required to be held by banks. The Fed is closely monitored by traders since the USD is the main reserve currency in the world.

Bank of Japan (BOJ):–

Currency: JPY

The Bank of Japan is responsible for ensuring the financial stability of the Japanese economy and the policy board is responsible for setting interest rates.

Since Japan is an export-driven country, it is against the Bank of Japan’s interest for the Yen to strengthen too much. Hence, intervention by BOJ is more often compared to the other central banks to prevent the yen from becoming too expensive.

European central bank (ECB):–

Currency: EUR

The ECB is the central bank of the 19 members of the European Union countries. This central bank’s mandate is to maintain a stable inflation rate of 2% and ensure currency stability.

You need to take note of the monetary policy decisions made by the bank governing council, which is responsible for set refinancing operation rates, marginal lending facility rates, and deposit facility rates.

Swiss National Bank (SNB):–

Currency; CHF

Switzerland’s central bank is responsible for the CHF, and it mandates it to maintain economic growth and price stability and inflation rates to 2%. The 3-month LIBOR market is used to determine interest rates.

The SNB also oversees the financial market infrastructures as a strategy to promote financial stability.

These are just a few examples of central banks and their roles in the Forex market. Other central banks, such as the Bank of Canada (BOC), Bank of England (BOE), the Reserve Bank of New Zealand (RBNZ), and Reserve Bank of Australia (RBA,) also play significant roles in their respective economies and impact their respective currencies in the Forex market. Hence you also need to focus on other central banks’ activity too.

I hope this article is helpful for you to understand Worldwide Central Banks and their roles.

Stay tuned to our website for more tutorials about Forex Market. If you have any suggestions or queries, feel free to Contact us or drop your message in the comment section below.

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