Deflation vs Disinflation

Updated on April 11, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

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.

Key Takeaways

  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:

BasisDeflationDisinflation
DefinitionAn economic condition where the purchasing power of consumers rise due to a decline in prices of commoditiesAn economic situation where the inflation rate falls gradually on a temporary basis
Overall ImpactNegativePositive
Opposite toInflationReflation
Impact on National EconomyWeakensStable and prosperous
FrequencyRareMore common
Price FluctuationSharp price declineGradual price rise
Impact on Stock MarketPerforms poorlyMayor may not perform poorly
Demand and Supply GapSupply exceeds demandThe negligible gap between supply and demand
Consumer BehaviorConsumers decrease expenditure expecting a future price declineConsumers spend money as per requirement, irrespective of price level
Employment LevelOccurs before full employmentOccurs after full employment
Measured byConsumer Price Index (CPI)Inflation rate
Dealt byUsing expansionary monetary policiesNo measure is taken
ExampleSevere deflation during the great recession from 2007 to 2009Disinflation in Japan during the 1970s

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What is Deflation?

Deflation Deflation Deflation is defined as an economic condition whereby the prices of goods and services go down constantly with the inflation rate turning negative. The situation generally emerges from the contraction of the money supply in the economy.read morerefers 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 policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more 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 economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more. During deflation, surplus goods supply brings down business profits considerably. Businesses have no alternative but to lower the price. In order to avoid bankruptcyBankruptcyBankruptcy refers to the legal procedure of declaring an individual or a business as bankrupt.read more, employee wages are curtailed. And, if that does not suffice, workers are let go.

Deflation vs Disinflation

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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 hyperinflationHyperinflationHyperinflation is merely an accelerated level of inflation that tends to quickly destroy the actual value of the local currency since there is a rise in the cost of all products and services, and it causes people to lower their holdings in that particular currency as they opt to participate in foreign currencies that are relatively more stable.read more, which is extremely harmful to its growth.

Causes and Economic Effect

The government takes various contractionary monetaryContractionary MonetaryContractionary monetary policy is the type of economic policy that is basically used to deal with inflation and it also involves minimizing the fund’s supply in order to bring an enhancement in the cost of borrowings which will ultimately lower the gross domestic product and moderate or decrease inflation too.read more measures to check inflation and price levels—to achieve disinflation. For instance, the federal bank either lessens the money supply or sells bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more.

The effect of disinflation is often considered positive—economic condition improves. It even results in a slight rise in commodityCommodityA commodity refers to a good convertible into another product or service of more value through trade and commerce activities. It serves as an input or raw material for the manufacturing and production units.read more prices and enhances the economy.

Deflation vs Disinflation Infographics

Let us understand Deflation vs Disinflation differences using infographics.

Deflation-vs-Disinflation-infographics

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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 marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more 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)Consumer Price Index (CPI)The Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark  point.read more. 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)

What is the opposite of disinflation?

Deflation is the opposite of disinflation, when a government boosts the money supply to encourage an economy.

Is recession the same as deflation?

A country is said to be in a “recession” if it has a significant drop in industrial production, real income, retail and wholesale sales, and GDP over two consecutive quarters. Conversely, deflation describes a condition in which asset and consumer prices decline over time.

Who benefits from deflation?

Consumers gain from deflation on the surface because they can eventually spend the same amount of money on more products and services.

What are the major effects of deflation on the economy?

In this circumstance, falling prices set off a domino effect that further drives down demand, wages, production, and price levels.

Recommended Articles

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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  1. Siddarth says

    Genius attempt