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.
Table of contents
- 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.
- 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.
- 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:
|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
|Impact on National Economy
|Stable and prosperous
|Sharp price decline
|Gradual price rise
|Impact on Stock Market
|Mayor may not perform poorly
|Demand and Supply Gap
|Supply exceeds demand
|The negligible gap between supply and demand
|Consumers decrease expenditure expecting a future price decline
|Consumers spend money as per requirement, irrespective of price level
|Occurs before full employment
|Occurs after full employment
|Consumer Price Index (CPI)
|Using expansionary monetary policies
|No measure is taken
|Severe deflation during the great recession from 2007 to 2009
|Disinflation in Japan during the 1970s
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.refers 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. 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.. 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., 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 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., 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. 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..
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. prices and enhances the economy.
Deflation vs Disinflation Infographics
Let us understand Deflation vs Disinflation differences using infographics.
The prominent deflation vs disinflation differences are discussed below:
- Deflation is negative—weakens the economy, whereas disinflation is positive—brings economic stability and prosperity.
- In deflation, prices fall considerably, whereas, in disinflation, prices plummet gradually.
- Deflation is an unbalanced economic condition—goods supply far exceeds the demand. In contrast, supply and demand remain balanced during disinflation.
- 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. doesn’t perform well in deflation, whereas it may or may not perform well in disinflation.
- 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.
- 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.. Disinflation, on the other hand, is measured with the help of the inflation rate.
- To tackle deflation, governments and banks take expansionary measures. Disinflation is self-correcting.
- For example, during the 2007 to 2009 recession, the US observed severe deflation. Also, during the 1970s, Japan faced disinflation.
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)
Deflation is the opposite of disinflation, when a government boosts the money supply to encourage an economy.
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.
Consumers gain from deflation on the surface because they can eventually spend the same amount of money on more products and services.
In this circumstance, falling prices set off a domino effect that further drives down demand, wages, production, and price levels.
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 –