Difference between Deflation vs Disinflation
The general price level of goods and services in the economy may show a positive trend, a downward trend or a slowdown in the positive trend. Based on these scenarios, concepts such as inflation, deflation, and disinflation come into the picture. Some people consider deflation vs disinflation as the same, which is untrue. Let us see what these two terms mean.
Deflation: This refers to a situation where the prices of goods and services fall. It is the opposite of inflation. Thus, when inflation is below zero, the scenario is referred to as deflation. For instance, an inflation rate of -3% is known as deflation. Deflation can be measured using Consumer Price Index (CPI), Wholesale Price Index (WPI), Producer Price Indexes (PPI), Retail Price Index (RPI), and so on.
Disinflation: This refers to a situation where there is a slowdown in the rate of inflation. For instance, a change in the inflation rate from 6% to 3% from one period to another is known as disinflation.
Deflation vs Disinflation (Infographics)
Below is the Top 10 Comparison between Deflation vs Disinflation.
Key Differences between Deflation vs Disinflation
We will get more clarity on the subject matter by reading about the differences between deflation vs disinflation in detail:
- Deflation happens when people don’t want to spend today but want to save for the future. The result of this is a lesser demand for commodities, which leads to a further fall in the price level. Under disinflation, the economy is generally growing and there is stabilization in the general price level. The demand for commodities is rising under disinflation.
- It intuitively appears that a fall in prices is good as the same amount of money can buy more goods. But, this is not the case. Deflation is a negative sign. If there is deflation, it is a warning that the economy could slip into recession or depression. Consumers’ reluctance to spend may result in a downward spiral of deflation, which may be more harmful in the future as it may result in a slowdown in consumption. Deflation results in layoffs, low income, a fall in salaries, and declining profits. If the economy is growing along with disinflation, then it is a positive sign. It is considered to be good for developing countries. If there is no economic growth along with disinflation, then it may be a warning for the economy. It could indicate that there may be deflation in the economy in the future.
- Deflation may result in social unrest as the economic condition of the country deteriorates. Disinflation generally leads to happy people as the rate of growth in prices reduces.
- Under deflation, the price can fall at a high rate. Under disinflation, the increase in prices are at a lesser rate. Thus, the rise in prices is gradual. Disinflation continues up to the rate of inflation is zero. After this period, there may be deflation where there is a fall in the general price level.
- Deflation may be caused by a fall in the money supply. Further causes include a fall in investment and government spending in the economy. Deferment of consumer spending can also result in deflation. A tight monetary policy by the central bank where interest rates are kept high can result in disinflation. Sometimes, a slowdown in business activity can also result in disinflation.
- Deflation is the exact opposite of inflation. Under inflation, there is a rise in prices whereas, under deflation, the prices fall. Under disinflation, there is a reduction in the level of inflation.
- Under deflation, people save money in the present for the future. This is done as they anticipate a further fall in prices. Under disinflation, consumers spend money normally as per their needs.
Deflation vs Disinflation Comparison table
Let us discuss the topmost comparisons between deflation vs disinflation.
| Basis of Comparison between deflation vs disinflation | Deflation | Disinflation |
| Definition | Under deflation, the general price level falls in the economy. | Under disinflation, the rate of inflation reduces over time. |
| Frequency | Deflation occurs very rarely as compared to disinflation. | Disinflation is a much more common occurrence than deflation. |
| Remedial Measures | Deflation may lead to recession or depression. Hence, governments usually take remedial measures at the first sign of deflation. An expansionary monetary policy where there is a reduction in interest rates can be used to deal with deflation. | Governments may not take any remedial measures when they see disinflation in the economy. |
| Example | During the Great Depression in the 1930s in the USA, there was double-digit deflation. Once the property bubble burst in Japan in 1990, Japan suffered deflation. | Almost all countries go through periods of disinflation from time to time. |
| Stock Markets | Stock markets generally perform badly during periods of deflation. | Stock markets may not perform badly during periods of disinflation. |
| Bond Markets | Due to central bank policy being favorable during such periods, bonds are likely to perform well. | During periods of disinflation, central banks are likely to reduce interest rates. Hence, bonds generally deliver above-average returns in such a scenario. |
| Impact | Deflation is destructive as it is accompanied by rising unemployment and a slowing economy. | As long as inflation is positive, disinflation is not considered to be generally negative. People may welcome disinflation if the earlier inflation rate is very high. |
| Supply Demand Dynamics | Under deflation, the supply is more than the demand. | Under disinflation, demand and supply are usually similar. |
| Employment Level | The employment level is less than 100% when deflation occurs. | The employment level is more than 100% when disinflation occurs. |
| Economy | The economy of the country is poor and weakening under deflation. | Under disinflation, the economy is stable and in good shape. |
Conclusion
Both deflations vs disinflation are scenarios that may occur in the economy. Good economic policies and monetary and fiscal intervention help in keeping both deflation and disinflation in check. Deflation is considered to be negative for the economy. Hence, it is necessary for governments to nip deflation in the bud at the first sign of it. But, disinflation is generally considered to be positive. In certain cases, disinflation may serve as a warning of an incoming recession or in rare cases, depression.
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