Disinflation refers to a short-term slowdown in the rate of price increases, indicating that inflation has dipped slightly for a while.
Learn more about Disinflation
Disinflation is a term the Federal Reserve (Fed) uses to talk about a time when inflation is slowing down. It’s important not to mix it up with deflation, which can actually hurt the economy. While inflation and deflation focus on whether prices are going up or down, disinflation is all about how fast inflation is changing.
It isn’t seen as a bad thing because prices don’t actually fall, and it usually doesn’t mean the economy is slowing down. For example, deflation might show up as a negative growth rate like -1%, while disinflation would look like a drop in the inflation rate from 3% one year to 2% the next. It is basically the opposite of reflation, which happens when the government boosts the economy by increasing the money supply.
A little bit of disinflation is actually good since it helps cool down an overheating economy. So, seeing disinflation isn’t unusual and is often considered a normal part of a healthy economy. It can also be beneficial for certain groups, like those who prefer to save their money.
What Causes Disinflation?
It often happens when central banks tighten up on monetary policy, like when they raise interest rates. It can also come from boosts in productivity and advancements in technology.
Conclusion
It is when the inflation rate slows down, usually for a short period. Supporters believe it’s crucial to keep the economy from getting too hot, while critics warn it might trigger a downturn or even deflation, signaling a shrinking economy.
This slowdown often happens when the money supply decreases due to higher interest rates, but it can also result from improvements in productivity or businesses increasing prices more slowly during a downturn. Looking back at the early 1980s, a phase of disinflation suggests that we might see the economy contract again in the coming years if history has a way of repeating itself.