Deflation vs Disinflation

What is the Difference Between Deflation and Disinflation?

Deflation and disinflation are different economic scenarios. While, deflation is an unfavorable economic condition, disinflation is a positive aspect. Deflation is caused by excess supply whereas disinflation is caused by governmental measures.

In a head-to-head deflation vs. disinflation comparison, the inflation rate plummets into negative with the former, and drops close to zero with the latter. Deflation is a rare condition—seen in under-employment scenarios. In contrast, disinflation is common—brought out by over-employment. While, deflation is defined as the opposite of inflation, disinflation is defined as the opposite of reflation.

1. Deflation refers to the general decline in the price level in the market caused by factors of demand and supply. In contrast, disinflation refers to a temporary slowdown in the degree of inflation.
2. Deflation is the exact opposite of inflation and is controlled by the market forces. Conversely, disinflation is the delimitation of inflation and is accounted for by the government.
3. Deflation is mostly seen as a negative sign since it implies a rise in unemployment, a decline in incomes, etc.

Comparison Chart – Deflation Vs. Disinflation

Though the terms sound similar, they are very different. Let us learn from the deflation vs disinflation comparison chart below:

Basis	Deflation	Disinflation
Definition	An economic condition where the purchasing power of consumers rise due to a decline in prices of commodities	An economic situation where the inflation rate falls gradually on a temporary basis
Overall Impact	Negative	Positive
Opposite to	Inflation	Reflation
Impact on National Economy	Weakens	Stable and prosperous
Frequency	Rare	More common
Price Fluctuation	Sharp price decline	Gradual price rise
Impact on Stock Market	Performs poorly	Mayor may not perform poorly
Demand and Supply Gap	Supply exceeds demand	The negligible gap between supply and demand
Consumer Behavior	Consumers decrease expenditure expecting a future price decline	Consumers spend money as per requirement, irrespective of price level
Employment Level	Occurs before full employment	Occurs after full employment
Measured by	Consumer Price Index (CPI)	Inflation rate
Dealt by	Using expansionary monetary policies	No measure is taken
Example	Severe deflation during the great recession from 2007 to 2009	Disinflation in Japan during the 1970s

What is Deflation?

Deflationrefers to an economic downturn where the inflation rate becomes negative—goods price falls—the purchasing power of people increases. As a result, the supply exceeds consumption or demand.

Causes and Economic Effects

The fall in demand is caused by monetary policies like increased interest rates offered by banks. As a result, customers end up saving more and spending less. Also, unpredictable scenarios like wars and pandemics force customers to save money for future challenges.

Comparing deflation vs disinflation, the former is a sign of a weak economy. During deflation, surplus goods supply brings down business profits considerably. Businesses have no alternative but to lower the price. In order to avoid bankruptcy, employee wages are curtailed. And, if that does not suffice, workers are let go.

What is Disinflation?

Disinflation is a temporary economic condition. Inflation is gradually brought close to zero. It is good for the economy (to an extent). Disinflation controls hyperinflation, which is extremely harmful to its growth.

Causes and Economic Effect

The government takes various contractionary monetary measures to check inflation and price levels—to achieve disinflation. For instance, the federal bank either lessens the money supply or sells bonds.

The effect of disinflation is often considered positive—economic condition improves. It even results in a slight rise in commodity prices and enhances the economy.

Deflation vs Disinflation Infographics

Let us understand Deflation vs Disinflation differences using infographics.

Key Differences

The prominent deflation vs disinflation differences are discussed below:

1. Deflation is negative—weakens the economy, whereas disinflation is positive—brings economic stability and prosperity.
2. In deflation, prices fall considerably, whereas, in disinflation, prices plummet gradually.
3. Deflation is an unbalanced economic condition—goods supply far exceeds the demand. In contrast, supply and demand remain balanced during disinflation.
4. The stock market doesn’t perform well in deflation, whereas it may or may not perform well in disinflation.
5. During deflation, consumers anticipate a price fall in the future—they reduce spending. In disinflation, on the other hand, consumers behave normally—they purchase commodities according to their needs, irrespective of the price rise.
6. Deflation is determined by evaluating the Consumer Price Index (CPI). Disinflation, on the other hand, is measured with the help of the inflation rate.
7. To tackle deflation, governments and banks take expansionary measures. Disinflation is self-correcting.
8. For example, during the 2007 to 2009 recession, the US observed severe deflation. Also, during the 1970s, Japan faced disinflation.

Conclusion

Disinflation vs deflation is the comparison of two economic situations. We infer that as long as absolute inflation levels remain positive, disinflation impacts the economy positively. Disinflation is seen as a mere warning signal—if it continues, the economy will go into recession. Deflation, on the other hand, is outright negative, it symbolizes a weakening economy.

Frequently Asked Questions (FAQs)

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This has been a guide to Deflation vs. Disinflation. Here we discuss reflation, inflation & the key differences between deflation and disinflation using examples, infographics, and comparison tables. You may also take a look at the following articles –

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