Inflation is the expansion of money and credit in an economy.
Deflation is the contraction of money and credit in an economy.
That is the simple difference between inflation and deflation, but there’s a deeper story.
The source of the difference between inflation and deflation lies in the ebb and flow of social mood. In the 1930s, R.N. Elliott discovered that the stock market (and hence the economy) progresses in a series of distinct and repeatable patterns which he called waves. The five-wave advance, three-wave decline fractal structure of growth means that the economy should, indeed, perennially advance as most people believe. However, the fractal nature means that the punctuations in economic growth (i.e., retrenchment, aka recessions or depressions) will, at various times, be deep and long-lasting.
What Elliott had discovered was that economic, and hence societal, progress is patterned and because the economy is driven by the collective mood of society, social mood is therefore patterned according to the Elliott Wave Principle.
When social mood is trending positively, people feel good about their circumstances and are inclined to behave accordingly. They buy stocks because they are optimistic about the future and, among many other manifestations of positive social mood, they also borrow and take on debt. Therefore, a positive social mood is accompanied with an increase in debt (or credit) – that is (one key part of) inflation.
When social mood is trending negatively, on the other hand, people feel bad about their circumstances and are inclined to behave in a negative way. They sell their stocks because they are pessimistic about the future and, also amongst many other manifestations of negative social mood, they do not take on new debt and seek to reduce their existing debt (or credit) – that is (one key part of) deflation.
The chart below is from Robert Prechter’s “Conquer the Crash” and it shows the economic results of major mood trends going back to 1700. Notice how progress is always made (prosperity) despite setbacks (depression).