🦔 As promised yesterday, I want to explain why the Fed has such a tough job ahead with everything going on in the economy. To understand their challenge, we need to know the difference between inflation, deflation, stagflation, and disinflation. Let me break these down for everyone so we can all understand. Also, side note that I am typing this all on my phone so apologies for mistakes!

With that said, let’s make a thread!🧵

INFLATION is when prices rise across the economy. Your grocery bill gets bigger, gas costs more, and housing becomes more expensive. When we have inflation, your money loses value over time…the $100 in your wallet buys less next year than it does today. Inflation happens when too much money is chasing too few goods. The Fed fights inflation by raising interest rates, making it more expensive to borrow money, which slows down spending. This is what they've been doing since 2021. DEFLATION is the opposite which is when prices fall over time. Sounds great, right? Actually, it can be terrible for the economy. When prices keep dropping, people wait to make purchases. Why buy a TV today when it will be cheaper next month? This leads to less spending, which causes businesses to earn less, lay off workers, and lower prices even more. Debts also become harder to pay because the dollars you earn are worth less than when you borrowed. Japan struggled with this trap for decades.