| By
Tim McMahon Updated Nov 19,2008
To fully understand disinflation we need to first
understand inflation. The reasons this is trickier
than it first appears is because the word inflation is
actually used in two different contexts.
The most common usage of the word inflation means rising
prices. Commonly "consumer prices" so when you go to
the gas station or the grocery store and the things you buy cost
more than last month (or when it is really bad even more than
last week) this is more precisely defined as "price inflation".
The second meaning of the word inflation is actually the
original meaning. And that is an increase in the money
supply that causes "price inflation" and this is called
"monetary inflation".
Inflation is measured by an index called the "consumer price
index" and the percentage change in this index from one year to
the next is commonly called the inflation rate. This is a
measure of price inflation.
So now the question is which "inflation" are we "dis"-ing.
Once again in common usage "Disinflation" means that prices are
not rising as fast as they once were.
So if the inflation rate is 5% one month (for the
previous 12 months) and the following month it drops to 4% (for
the previous 12 months) we have experienced 1% disinflation.
Note that 11 of the monthly periods in this example overlap
so the major difference occurred between the first month of the
first period and the last month of the second period.
Often people confuse disinflation with deflation.
Perhaps because they think disinflation is the opposite of
inflation.
This however is not the case, in some ways disinflation
is kind of like baby inflation. In disinflation, prices
have not fallen which would be the opposite of rising prices
they have simply stopped rising as fast as they once were.
Deflation on the other hand is where prices have stopped
rising altogether and are actually falling. So in our
previous example we had an inflation rate of 5% when the rate
dropped to 4% we had disinflation and if it dropped all the way
to a negative 1% (-1%) we would
then have deflation.
Recently we have experienced deflation in the price of
gasoline as it went from over $4.00/gal down to $2.00/gal. we
have had 50% deflation in the price of gasoline.
Spotting disinflation in the real world is much more
difficult. If the price of gasoline was $4.00 one
month and $4.40 the following month we could recognize a monthly
inflation rate of 10%.
If the following month the price was $4.62 we would say
prices inflated by 5% this month because they were up 5%. We
wouldn't say that they disinflated by 5% because they rose 5%
less than the month before.
For more information see:
What is Inflation?
What
is Deflation?
What
is Stagflation and why is it so bad?
Inflation Cause and Effects
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