Disinflation and Deflation are the concepts that you would come across in economics. Moreover, you will hear both these terms less often than inflation. Inflation, as we all know, is the rise in the general price level. And, deflation is the opposite of inflation, and means a drop in the general price level. Similarly, most also believe disinflation to mean the same thing as deflation. But, in reality, the two are very distinct from each other and mean two varying concepts. So, it is very important for you to know and understand the differences between Disinflation vs Deflation.
Before we talk about the differences between Disinflation vs Deflation, let’s understand what the two terms mean.
Disinflation vs Deflation – Meaning
Deflation, as said above, refers to the drop in the general price level. For instance, an inflation rate of -1% is deflation. One reason for the deflation is people saving more for the future than what they are spending. This leads to a drop in the demand, and in turn, a drop in prices.
A country witnessing deflation may easily slip into depression or recession. Deflation usually results in unemployment, social unrest, a drop in investment and negative growth.
Disinflation, in contrast, refers to the phenomenon when there is a slowdown in inflation. In this, the inflation rate slows down but remains positive. For example, if the inflation rate drops from 4% to 2%, then it is disinflation. A point to note is that disinflation doesn’t refer to a direction of prices, rather it tells about the rate of change in inflation.
Disinflation is not a negative sign for an economy, rather it may mean that an economy is stabilizing. During this period, the demand for the commodities may actually rise as a drop in prices may encourage people to buy more.
However, disinflation remains positive for a country as long as the inflation rate is away from zero. If the inflation rate nears zero, then the economy would start feeling the pressure of slipping into recession and then this force people to pull money from the markets.
Disinflation vs Deflation – Differences
These are the differences between Disinflation vs Deflation:
An economy witnesses deflation if there is a fall in the general price level. In contrast, disinflation is when the rate of inflation slows temporarily.
Disinflation is more frequent in a country. On the other hand, deflation is less frequent in comparison to disinflation.
Deflation may push a country into recession or depression. Thus, to keep a check on it, or to control it, the authorities would have to use expansionary monetary policies. These policies include, lowering the interest rate and more. In contrast, the authorities may not resort to any remedial measures during the disinflation period.
There could be several responsible for deflation. These factors are a drop in consumer spending, investment, money supply, govt. expenditure and more. Disinflation, on the other hand, could be due to a pull down in the business cycle, the use of tight monetary policy and more.
The Great Depression in the 1930s is the biggest example of deflation. At the time, the U.S. saw a double-digit deflation. Japan also saw deflation during the 90s after the property bubble burst. You can get examples deflation every now and then. Since disinflation is common, almost every economy go through disinflation from time to time.
During deflation the stock market doesn’t perform well and witnesses a drop. However, during disinflation, the stock market may or may not go down. In fact, the stock market may gain.
During the deflationary period, the bond market may perform well due to the adoption of favorable policies by the central bank. During disinflation, the bond market could give above-average returns because central banks usually lower interest rates at such period.
During deflation, the employment level is below 100%, or the unemployment rises. But, during disinflation, there may or not be any change in the employment level.
Deflation isn’t good for the economy. So, during the period of deflation, an economy may witness a rise in unemployment and a slowdown in the economy. On the other hand, disinflation isn’t believed to be negative for the economy. In fact, the general public may welcome it if the prices drop after high inflation.
Supply and Demand
During deflation, supply is usually more and the demand is less. But, in the case of disinflation, the supply and demand are more or less the same.
The economy is weaker and the growth rate drops or is negative during the deflationary period. At the time of disinflation, the economy is positive and stable.
During deflation, people tend to save more, expecting the prices to drop further in the future. During disinflation, people continue to spend as per their requirements.
Deflation may result in social unrest because people lose jobs and the overall economic scenario is grim. Disinflation, on the other hand, could make people happy as the prices drop.
A deflationary period will continue until the inflation rate is positive or zero. On the other hand, the disinflation period will continue until the inflation rate is zero. And, if the inflation rate drops below zero, then it would be deflation.
Value of Money
The real value of money goes up during deflation. Or, we can say the purchasing power rise as people would be able to buy more items with the same amount of funds. This may look positive, but in reality, it is not. This is because people put off spending money, anticipating a further drop in prices. In case of disinflation, the value of money may depreciate, but it is overall good for the economy.
|Meaning||Temporary decrease in the rate of inflation||Fall in the general price level|
|Frequency||More frequent||Less frequent|
|Factors||Due to a pull-down in the business cycle, the use of tight monetary policy, and more||Drop in consumer spending, investment, money supply, govt. expenditure and more|
|Example||Almost every economy go through this||The Great Depression in the 1930s|
|Stock Markets||May or may not go down or may gain||Doesn’t perform well|
|Employment||May or not be any change in the employment level||Employment level is below 100% or the unemployment rises|
|Supply & Demand||Supply and demand are more or less the same||Supply is usually more and the demand is less|
|Economy||Weaker & negative growth rate||Positive and stable|
|Time Period||Continue until the inflation rate is positive or zero||Continue until the inflation rate is zero|
|Value of Money||Real value of money goes up||Value of money may depreciate|
Both deflation and disinflation are economic situations that any economy may have to face. A country can keep a check on both these scenarios using the right monetary and fiscal policies. For an economy, however, it is more important to check deflation than disinflation. In fact, the country should implement policies to avoid slipping into deflation.