The word disinflation very simply means the slow down of inflation. Often when inflation is very low already and disinflation kicks in, there is worry that it could soon lead to a recession. This means we need to understand the nature of inflation in its various forms. In my opinion there are two forms of inflation – ”price inflation” and “monetary inflation”.
Price inflation is one where prices of commodities rises. Typically this is tied to a rise in oil and fuel prices, since energy costs are intrinsically tied into the cost of production of products and services. Monetary inflation is the result of increased money supply in the economy. This is usually the result of easy credit and high lending activity. A natural effect of monetary inflation is the rise in asset prices. Inflation is measured by an index called the “consumer price index” and the percentage change in this index from one year to the next is commonly called the inflation rate. This is a measure of price inflation.
If disinflation continues until the inflation rate is zero, the economy enters a deflationary period, with decreasing general prices on all goods and services produced. An example of this happened during the month of October 2008, when U.S. consumer prices fell (deflation) by 1.01% but the overall annual inflation rate simply decreased (disinflation) from an annual rate of 4.94% to 3.66%. So the distinction between deflation and disinflation at that point was simply one of which time period was being referring to, the monthly basis or the annual basis. Over the year, prices were up 3.66% while over the month prices were down 1.01%.
Many economist argue that despite extensive monetary easing (reduced interest rate) in almost all major economies, which increased the money supply significantly from the 2008 – 2009 lows, we are likely to see disinflation. Their argument is supported by the deleveraging phenomenon that has started in the consumer segment. Though I agree with them in expecting a change in consumer behavior, it is almost certain that governments will intervene in every available venue to introduce inflation which is the driving factor for growth – (at least in theory).
Tags: annual inflation rate, change, consumer price index, disinflation, index, monetary inflation, price inflation, recession, result