|
|
|
|
Disinflation
|
| |
|
| |
Disinflation is a decrease in the rate of inflation. This phase of the business cycle, in which retailers can no longer pass on higher prices to their customers, often occurs during a recession. In contrast, deflation occurs when prices are actually dropping.
To fully understand disinflation we need to first understand inflation. The word inflation originally meant an increase in the the supply of money which resulted in an increase in prices.
Discussion
Ask a question about 'Disinflation' Start a new discussion about 'Disinflation' Answer questions from other users |
Encyclopedia
Disinflation is a decrease in the rate of inflation. This phase of the business cycle, in which retailers can no longer pass on higher prices to their customers, often occurs during a recession. In contrast, deflation occurs when prices are actually dropping.
To fully understand disinflation we need to first understand inflation. The word inflation originally meant an increase in the the supply of money which resulted in an increase in prices. But, in more recent years, the word inflation has come to mean the result rather than the cause. i.e. an increase in prices rather than an increase in the supply of money. This might be partially the result of the wide spread usage of the term "inflation rate" which measures the rate of price increases rather than the increase in the money supply.
Disinflation on the other hand is a more recent term and so only has the connotation of moderating prices i.e. prices that are not increasing as quickly as they once did. For example if the annual inflation rate one month is 5% and it is 4% the following month, prices disinflated by 1% but are still increasing at a 4% annual rate.
Disininflation can continue at that rate for four more months until the inflation rate is zero. At that point, disinflation becomes deflation as prices are now decreasing. The tricky part is that during the month that annual prices were disinflating, monthly prices may actually be deflating. A perfect example was during the month of October 2008. During that month US consumer prices fell (deflation) by 1.01% but the overall annual inflation rate simply decreased (disinflation) from an annual rate of 4.94% to 3.66%.
So the distinction between deflation and disinflation at that point was simply one of which time period were you referring to, the monthly basis or the annual basis. Over the year prices were up 3.66% while over the month prices were down 1.01%.
Deflation is a sustained decrease in the general price level resulting in a sustained increase in the real value of money and other monetary items. Money and other monetary items are worth more all the time during deflation as opposed to being worth less all the time during inflation. Deflation is negative inflation.
Disinflation is lower inflation. Prices are still rising during disinflation, but at a lower rate. The general price level still rises, but, at a slower rate resulting in a continued, but, lower rate of real value destruction in money and other monetary items. A lowering of inflation is not deflation but disinflation.
Deflation means the general price level is not increasing at all, but, actually decreasing continuously and the internal functional currency – money - and other monetary items are worth more all the time. Deflation causes an increase in the real value of money and other monetary items.
Inflation destroys real value in money. Disinflation destroys real value in money more slowly. Deflation creates real value in money.
Inflation is a sustained increase in the general price level. Disinflation is a slower sustained increase in the general price level. Deflation is a sustained decrease in the general price level.
Disinflation happens after a period of higher inflation in what are normally considered low inflation economies and is initially popularly confused with deflation. During disinflation many prominent prices, for example, oil, fuel, commodity, property and food prices are falling, but, the general price level is still actually rising, albeit at a much slower rate than during normal low inflation. When the slowing annual inflation rate moves lower and lower it eventually gets to a zero percent annual rate for maybe a month or two. When the general price level then continues to decline even further - below zero percent per annum - the economy moves from inflation to deflation: not just a slower increase in the general increasing price level as during disinflation but actually a sustained decrease in the general price level below zero percent per annum which causes an increase in the real value of money and other monetary items: the opposite of inflation or negative inflation.
Countries have little experience of deflation. Deflation is generally regarded as a very serious economic problem that everyone is trying to avoid at all costs especially after what happened during the Great Depression.
See also
Further reading
External links
- by Timothy McMahon, at InflationData.com
|
| |
|
|
