Deflation and Disinflation

Deflation and disinflation are linked to the term inflation and used with reference to change of prices in an economy. While these two terms sound similar, their meanings are quite different. As we know, inflation refers to the rise of price levels in an economy, and deflation is the opposite, a fall in price levels.

What is Disinflation?
Prices don’t fall during disinflationary periods, they just don’t rise as much. Prices are still rising in the Indian economy, though the pace has slowed down. This means, India is currently witnessing disinflation: the price rise has slowed down significantly as compared to, say, 2 years ago. Unlike deflation, disinflation is considered a positive sign and capital markets, especially the bond markets, tend to react positively to it. But disinflation without economic growth can be a cause for worry. If inflation slows down quickly, and is not accompanied by a faster growth of gross domestic product (GDP), it could lead to a slowdown of economic growth, followed by falling productivity and rising unemployment.


What is Deflation?
Deflation refers to fall of prices. It may seem like a good thing, but in reality no economy wants deflation. Deflation usually accompanies economic slowdowns, lower productivity and loss of jobs. Inflation decreases the value of money, deflation increases its value. This incentivises people to save money now, to buy later when things become cheaper. And this economic behaviour leads to further slowing of growth. During deflation, value of money increases and goods become cheaper. However, your earnings could reduce due to the economic slowdown. During the Great Depression in the 1930s, deflation was in double digits. In recent times, Japan has been struggling with deflation for two decades. A positive impact of deflation could be increased export competitiveness, if most other economies are experiencing inflation.

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