Explaining the difference between Disinflation and Deflation
Fears of price deflation now seem a distant memory with CPI inflation in the UK economy climbing to 11% during 2022. Students often confuse disinflation with deflation, so we have produced a quick video primer on this and included some charts to show what has been happening to inflation, interest rates and real wages.
What is disinflation?
Disinflation refers to a slowdown or a fall in the annual rate of price inflation. Consumer prices are still increasing, but more slowly. This drop in the inflation rate may be temporary in nature.
What might cause a period of disinflation?
- An economic slowdown / recession which dampens down demand-pull inflationary pressures
- Slowdown in aggregate demand might have been caused by a central bank raising interest rates to tighten monetary policy.
- An appreciation of the exchange rate which leads to a fall in the costs / prices of imports – remember the acronym (SPICED): Strong pound, imports cheaper, exports dearer
- A drop in global prices for key inputs such as oil, gas and copper