What Is Disinflation?

This curious phrase is not meant to indicate the opposite of inflation. According to economic texts and encyclopedia information, with disinflation, prices don’t increase as quickly or as much as they would during inflation. The opposite of inflation is actually deflation, when prices at retail outlets drop in real terms.

Most people think of an increase in the money supply of a nation when they are discussing inflation. This was the traditional way to use the term “inflation,” as it indicated that there was significant impact on prices because of the increase in “money” available. In recent years, the term “inflation” has been applied to the finished state, rather than the process, which is misleading. During the constant movement that is inflation, there are times or points of disinflation. Price increases slow down, even though they might be trending upward overall. An example might be a long-term rate of inflation at 6 percent in one quarter, then another quarter of 5 percent, but the overall rate for the year is 5 percent.

As defined above, disinflation might continue for a period of time until prices are no longer decreasing. If the prices continue to go down from a zero rate of inflation, then the economy is experiencing deflation. That is why deflation is truly the opposite of inflation. While the effect is the same, the terms are used by economists and political leaders as they try to explain changes in economic status to citizens.

It’s interesting to note that economists and others who explain the various processes mentioned above emphasize that disinflation simply cuts true money value at a slower rate. Deflation increases money value. However, studies have shown that prices for many consumables and “everyday” items might be going down slightly, though prices for other items, including real estate are still on the rise. This mixed disinflation/inflation is a good example of the complexity of consumer economics.

All of the movement described above (in consumer prices) is measured or tracked by a consumer-price index. Economists and political analysts not only track prices of individual items that people might buy, they also keep track of overall prices by using this index (also known as CPI).

The CPI is an estimate, an average of consumer-goods prices. But it also includes the cost of various services purchased by consumers. The CPI has been refined over the years to include a specific set of items, in order to give the measure consistency. Various nations use similar averages or consumer indexes, which are known by different names or a set of initials.

Companies that pay wages and salaries use the CPI to help set their pay scales. If there is disinflation, with prices changing at a slower rate, the company may see that reflected in the CPI over a long term.

This allows them to compensate workers accordingly. In fact, the CPI may be the most important guideline for addressing the effects of inflation, deflation and the curious form of inflation – disinflation.

Written by Lucas Beaumont

Generalist. Wikipedia contributor. Elementary school teacher from Saskatchewan, Canada.

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