Differences Between Deflation and Disinflation
Deflation refers to the situation of falling of the general price level in an economy which can be caused by the decrease in money supply, corporate investment, consumer spending and government spending etc. and can be the prime reason behind the rise in unemployment in the economy of the country whereas disinflation refers to the situation of temporary slowdown of the price inflation and have a healthier impact on the well being of the economy as it helps in minimizing or rather eradicating the vulnerable implications of inflation.
In the world of economics, inflation plays a very instrumental role as it measures the growth of any nation’s economy due to the rise in the price level in general. Inflation can also manifest to influence various aspects of society like general prosperity and employment scenario. However, this article is not about inflation exactly, but about two other related terms. In a similar context, two other terms namely, deflation and disinflation, which might sound quite similar but are distinctively different from each other in meaning.
What is Deflation?
Deflation is a situation where the general price level falls in an economy. Although this might sound favorable, usually deflation is accompanied by the slowdown of the economy which eventually is likely to result in an increase in unemployment. Deflation indicates that the value of money has appreciated which could happen when people don’t want to spend much today but save for the future.
This leads to lower demand for commodities which results in further fall in the price level. Lower price level means a lower overall gross domestic product which again results in more unemployment. The Great Depression of 1929 is a prime example of deflation where it went into double digits and scarred the US economy severely. Japan also has been inflicted with deflation for two decades from which the nation has recovered recently. To make it clear, an inflation rate of -1% would be termed as deflation.
What is Disinflation?
Disinflation is a situation where there is a price rise in the economy, but the increase in price is moderating year after year. So unlike deflation, this scenario indicates that the economy is growing accompanied by stabilization of the general price level which is a positive sign. In a disinflationary economy, the value of money is there to the extent that the demand of the commodities is also not impacted but rather is on the rise. Slowly increasing the price coupled with a gradual increase in demand means continuous improvement in overall domestic production and more employment and hence a prosperous nation.
However, if the disinflation is not accompanied by economic growth then it can be a warning bell that the economy might be getting into stress in the near future. The Indian economy which is still witnessing the increase in prices is a prime example of a disinflationary economy. However, the rise in prices has been slowing down significantly year on year which is the sign of a stable economy. To make it clear, if the inflation rate has declined from 5% in Year 1 to 3% in Year 2, then it is a disinflationary economy.
Deflation vs Disinflation Infographics
Key Differences
- Deflation is a situation when the general price level falls in the entire economy which is usually a sign of a weakening economy. On the other hand, disinflation is a situation where the inflation rate moderates over a period of time which can be a positive sign for an economy.
- In the case of deflation, the inflation rate is less than zero. While in the case of disinflation, the rate of inflation is positive but reducing with time.
- Deflation is exactly the opposite of inflation, whereas disinflation is the inflation which is reducing.
- The driving factor for deflation is the demand-supply gap owing to excessive supply (output) in the economy as compared to the nation’s appetite. On the other hand, disinflation may be the result of the supervisory intervention and the initiative of the government to control the price level.
- Deflation happens before society achieves full employment while disinflation happens after full employment in society.
- In a deflationary economy, the downside risk of price fall below the normal level can be severe as the price may fall to zero. While in the disinflationary economy, the downside risk of price fall is limited to the extent of the normal level.
Deflation vs Disinflation – Comparative Table
| Basis for comparison | Deflation | Disinflation | ||
| Meaning | General price level falls in the entire economy | Inflation rate moderates over a period of time | ||
| Sign | In most scenarios seen as a negative | Usually seen as a positive | ||
| Cause | Demand-supply gap owing to excessive supply in the economy as compared to the nation’s appetite | Supervisory intervention and initiative of the government to control the price level | ||
| Employment level at the occurrence | Less than 100% | More than 100% | ||
| Price | The price can go as low as close to zero (no value) | The price fall is limited to the normal level | ||
| Range | Less than zero | More than zero | ||
| Demand-Supply Gap | Supply is significantly greater than demand | Demand and supply go hand-in-hand | ||
| Direction of price change | Price Declines | Price increase | ||
| Rate of price change | The price fall can be at a significantly high rate | The price rise is gradual | ||
| Consumer behavior | Save money today for future expense on the expectation of the further price decline | Spend money as per requirement irrespective of the price level | ||
| National economy | Weakening in nature | Stable and prosperous |
Conclusion
So, disinflation and deflation are two situations that an economy exhibits. It can be inferred that as long as absolute inflation levels continue to remain positive, disinflation can be seen as a positive sign for the economy. However, disinflation can be a warning signal for the economy if it continues to the extent of the onset of the recession. On the other hand, deflation is an outright negative signal for society and can be seen as a symbol of a weakening economy. I hope based on this article one will be able to differentiate between the two terms if they come across them in the future.
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