Inflation is a term used in economics to represent increasing goods and services prices. Similarly, it signifies a decline in a currency’s purchasing power. Inflation can be good or bad, depending on various factors. There are two terms associated with inflation that people often confuse. These include deflation and disinflation. While they may sound similar, both are different from each other.
What is Deflation?
Deflation represents a decline in prices for goods or services over a specific period in an economy. It also entails the increase in a currency’s purchasing power. Deflation is when an economy experiences no inflation. Instead, it goes through a period when the inflation is negative. That is why another name used for deflation is negative inflation.
There are two factors that contribute to deflation in an economy. These factors come under two categories. These include a fall in aggregate supply and aggregate demand. In both these cases, the consumption in an economy decreases. It then causes item prices to fall. Some consumers stop spending during this period as they may expect item prices to decline even further.
What is Disinflation?
Disinflation does not represent negative inflation in an economy. Instead, it signifies a decrease in the inflation rate in the economy. It often portrays events when the inflation rate in an economy reduces marginally over a relatively short period. In simple terms, disinflation represents the rate of change in the inflation rate rather than the direction in which it fluctuates.
Disinflation, unlike deflation, does not have the same adverse characteristics. It is because it does not cause item prices to decrease or purchasing power to increase. It also does not indicate an economy is slowing down. Disinflation is a relative term that describes the change from inflation from one period to another.
What is the difference between Deflation and Disinflation?
There are several differences between deflation and disinflation. These are as below.
The primary differences between deflation and disinflation come from their definitions. As mentioned, deflation represents negative inflation. On the other hand, disinflation signifies a reduction in the inflation rate over a period.
Deflation can have adverse impacts on an economy. It usually causes higher unemployment, lower production, lesser economic activity, etc. On the other hand, disinflation does not have the same impacts as it is not negative inflation. Instead, it carries all the effects of inflation but at a slower rate.
Deflation is relatively rare compared to disinflation. It is because the prices for goods and services seldom decrease compared to previous periods. However, disinflation is more common.
Deflation can cause countries to suffer from a recession or even a depression. Therefore, most economies use countermeasures to safeguard against such effects. On the other hand, disinflation is not concerning for governments. Therefore, there are no countermeasures against it.
Deflation can adversely impact consumer behaviours. As mentioned, consumers usually refrain from spending money due to deflation. It further amplifies the existing issues. However, the same does not apply to disinflation. Most people don’t even notice it. Therefore, there is no change in consumer behaviour due to disinflation.
Inflation represents the increase in the prices of goods and services in an economy. Two terms associated with it include deflation and disinflation. Deflation is the negative inflation in an economy. However, disinflation signifies a decrease in the inflation rate. Both are different in several regards, as mentioned above.