Deflation

Inflation, Deflation, Disinflation

The Difference Between Inflation, Deflation, and Disinflation

Inflation is a general increase in the price level. The price level represents the prices of most products in an economy. Thus, the prices of most products are increasing during periods of inflation. The forces of supply and demand still determine prices in individual markets. Yet, inflation creates a tendency for prices to rise throughout the economy.

The inflation rate measures how quickly the price level changes. It is usually reported on an annual basis. In October 2003, for example, the inflation rate was 2.04%. This means that if prices rose at this same rate for an entire year, then they would be 2.04% higher on October 1, 2004 than they were on October 1, 2003. (The price index was actually 0.17% higher on October 31, 2003 than it was on October 1, 2003. Twelve months multiplied by 0.17% yields an annual rate of 2.04% per year.)

Deflation is a general decrease in the price level. During periods of deflation, the prices of most products are decreasing. Deflation is undesirable because it usually causes a significant decrease in overall spending (i.e., aggregate demand) in an economy and is most likely to occur when the economy is already stagnant. For example, deflation occurred in the United States during the Great Depression. Deflation occurs when the inflation rate is negative.

Disinflation occurs when the inflation rate decreases, but remains positive. For example, if the inflation rate changes from 6% in January to 5.5% in February to 5.2% in March, economists would say there is disinflation in the economy during the first quarter of the year (i.e., during January, February and March)

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Inflation, Deflation

AS Macro Revision: Inflation and Deflation from tutor2u

Inflation, Disinflation, Deflation

Inflation, Deflation, Disinflation –  What’s the Difference?

Increasingly in the media, there are discussions relating to deflation: are we experiencing deflation, and is deflation worse than inflation? Occasionally, discussions of the economy refer to disinflation. This will be the first in a series of posts exploring price changes and their implications for investing.

Inflation: our old familiar friend
Inflation is a pretty familiar phenomenon for most people; we’re used to seeing prices go up generally over time. If you’re old enough, you may even remember the 1970’s, when prices spiraled dramatically upward and President Gerald Ford encouraged everyone to respond by wearing “Whip Inflation Now” lapel buttons.  To no one’s surprise, this wasn’t enough to end inflation.

Disinflation: kinder, gentler inflation
Disinflation is a convenient way of saying that the inflation rate is decelerating: prices are still going up over time, but they’re not increasing as fast as they were in some previous time period.  At the end of the 1970’s we experienced disinflation as the annual inflation rate declined from a nasty peak around 15%.  In the latter half of last year, the CPI inflation measures began signaling a decline in inflation, so we’ve experienced a less extreme period of disinflation more recently.

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Inflation, deflation - causes and effects

Definition: Inflation is when prices rise, and deflation is when prices fall. You can have both inflation and deflation at the same time in various asset classes. When taken to extreme, both are bad for economic growth, but for different reasons. That's why the Federal Reserve, the nation's central bank, tries to control them. Here's how to recognize the signs of rampant inflation and deflation, and to protect your finances.

How to Tell the Difference Between Inflation and Deflation

There are fives types of inflation. The worst is hyperinflation. That's when prices rise more than 50% a month. Fortunately, it's rare. That's because it's only caused by massive military spending. On the other end of the scale is asset inflation, which occurs somewhere nearly all the time. For example, each spring oil and gas prices spike because commodities traders bid up oil prices. They anticipate rising demand at the pump thanks to the summer vacation driving season. 

The third type, creeping inflation, is when prices rise 3% a year or less. It's somewhat common. It occurs when the economy is doing well. The last time it happened was in 2007.

The fourth type is walking, or pernicious, inflation. Prices increase 3-10% a year, enough for people to stock up now to avoid higher prices later. Suppliers and wages can't keep up, which leads to shortages or prices so high most people can't afford the basics.

The fifth type, galloping inflation, is when prices rise 10% or more a year. It can destabilize the economy, drive out foreign investors, and topple government leaders. It's a result of exchange rate fluctuations.

Deflation is when prices fall, but it can be difficult to spot. That's because all prices don't fall uniformly, and you can even have inflation in some areas of the economy.

For example, there was deflation in oil and gas prices in 2014, while prices of housing continued to rise, although slowly. However, the Federal Reserve measures the core inflation rate, which takes out the volatile price changes of oil and food.

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Inflation and deflation

Inflation and deflation

Inflation and deflation arise from changes in either the demand side or supply side of the macro-economy.

Demand pull inflation

Demand pull inflation usually occurs when there is an increase in aggregate monetary demand caused by an increase in one or more of the components of aggregate demand (AD), but where aggregate supply (AS) is slow to adjust.

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