Inflation is too much currency chasing to few goods, deflation is too little currency chasing too many goods. Both are monetary phenomenon, the result of an act by monetary authorities. If they print too much, prices go up, if they print too little, prices go down.
With inflation, people who owe money benefit, because they get to pay old debts with newer, less valuable money. This is normally the super rich who have vast holdings built on debt. I can also the poor, since they too have debts, but the poor get hammered by another facet of the same event.
When the newly printed money is released into the banking system, the early receivers, that is banks, huge business and wall street, pay off their old debts with this newer cheaper money. Prices rise al along the production and distribution channel, over time rising before, finally, wages rises lastly. Larry Lunchbucket pays the difference, in consumption, hundreds of millions of people making daily purchases, having less as the people at the top have already gained more.
With deflation, the people who lend money benefit, because when the money is returned it buys more than when it was lent out. This can benefit the poor since their paycheck goes farther week by week. those who make things and lend money cannot have that. That is why deflation is considered so terrible.
One aspect is inflation and deflation can be asset class specific: house prices rise, but not energy prices.
The solution to inflation and deflation is the powers-that-be print none at all. Leave currency in the hands of private banks. Let them live and die by sound money and currency. Free people never trust a government with money, or like-money.
Prices rise and fall for other reasons as well, chiefly supply and demand. If there is too little of something, the price will rise, signalling the market to produce more. It the price is lowering, it signal the market to make less.
Prices may lower and still signal “more!” if the costs drop faster than the price, allowing better profits even at lower price. Cell phones keep falling in cost to make, faster than the price at retail. There is a spread to arbitrage. The makers are ever more profitable, although prices are falling.
Prices may rise and signal "more!" when the new combination of materials and processes yield ever more attractive benefits and features, and attract even more buyers. Apple's cheapest laptop is about $1000, when a Dell is about $400.
Prices are falling when your get more at the same price. The computer is still $1000, but last year it had 1 gig ram, this year 2 gig ram. Prices are rising when the gallon of ice cream was $5.00 last week, and this week it is 4/5ths a gallon, for $5.00. You did not notice the package is smaller. You did not notice the price went up 25%.
Force or fraud or both can change prices as well.
Prices rising due to force: Marijuana is a weed, but its price is quite high given the violent interdiction in support of the law against its use and distribution.
Prices rising due to fraud: Educational cost is rising not due to the cost of what occurs in the classroom, but what occurs in the administration building. The cost of administration is presented as necessary to education, but this is untrue, a fraud.
Prices lowering due to force: In USA, prisoners are forced to work for roughly ten cents an hours.
Prices lowering due to fraud: Food in USA is relatively cheap due to adulteration.
This can go on, given human nature, for astonishingly long periods. And this often leads to violence in reaction when misallocation and malinvestment lead to tipping-point anger.
A problem is as observers see prices rises and lowering, most authorities and their advising economists only seeing prices going up or down. Or even if they do understand, they see an opportunity to declare a crisis and advance on the populace with force or fraud, or both.
The only school of economics that can readily discern the differences is the Austrian school. No other have the theoretical basis to make a rational determination. Another place to study is here.
In a free market economy, these two events, prices rising and falling are critical. Innovation and entrepreneurship, and conservatives and commoditization, what I describe in my book and classes, and where beneficial, free of force and fraud, is where the beneficial economy occurs. In a free market, the new is called forth from the entrepreneur by the experience of lack; each iteration of the good or service leads to wider acceptance, until finally it is commoditized by the conservator, at a price virtually the entire populace can afford.
Rising and falling prices can be good, or bad. It depends on what is behind it. We need to know the difference.
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