Deflation vs Disinflation
Deflation and disinflation are both related to changes in the price level, in the economy. Price levels can be measured by GDP deflator (Gross Domestic Product) or CPI index (Consumer Price Index). Deflation and disinflation are both closely related to one another and are also related to the concept of inflation that many of us are familiar with. Deflation and disinflation can be easily confused if the concepts behind these terms are not completely understood. The article provides a comprehensive explanation of both deflation and disinflation and outlines the similarities and differences between the two.
What is Deflation?
Deflation, as its name suggests is the opposite of inflation. While inflation refers to the increase in the price levels in an economy, deflation refers to the decrease in the price levels. Deflation occurs as a result of a reduction of the money supply in an economy. The money supply in the economy may be due to less spending resulting from higher levels of unemployment. As unemployment increases, there will be less disposable income to spend on goods and services, which will result in slowing demand and lower money supply. When demand falls the prices of goods and services will fall until it reaches a level at which people can afford the cost. The reduction in demand for goods and services will further fuel unemployment levels.
Deflation can also be caused by lower investment by corporations or the government which can lead to unemployment, lower spending, less demand resulting in deflation.
What is Disinflation?
Disinflation is very much related to inflation. An economy that is experiencing disinflation will see that the economy price levels are increasing, but at a slower rate. In simpler terms, disinflation is inflation at a reducing rate; it is also known as ‘slowing inflation’. For example, in the USA, in 2007, the price level increased by 10%; in 2008, it increased by 8%; in 2009, prices increased by 6%, and in 2010, price levels increased by 3%. As you can see, there was a positive increase in the price levels, but at a slower rate.
Disinflation is a sign of a healthier economy; since price levels are increasing, businesses will keep investing, producing, and creating jobs, and since price levels are increasing at a controlled pace, there will be a lower burden on the consumer who will continue to demand goods and services.
Deflation vs Disinflation
Disinflation and deflation are closely related to one another, and both are measured by changes in the general price levels. Deflation can result in higher unemployment, whereas disinflation will have a healthier effect on the economy by removing the disastrous effects of inflation. Disinflation helps control the price levels in an economy to a manageable level, whereas deflation may result in very low prices that are unhealthy for trade, business, investment, and employment.
Summary:
• Deflation and disinflation are both related to changes in the price level, in the economy. Price levels can be measured by GDP deflator (Gross Domestic Product) or CPI index (Consumer Price Index).
• Deflation, as its name suggests is the opposite of inflation. While inflation refers to increase in the price levels in an economy, deflation refers to the decrease in price levels.
• An economy that is experiencing disinflation will see that the economy price levels are increasing, but at a slower rate.