You might think, on first glance, that deflation and disinflation mean similar or even identical things. After all, the concepts they imply seem remarkably alike, don’t they? If you were to deflate a tire, wouldn’t it be the same as disinflating it? But this is actually not the case. Deflation and disinflation, in the field of investing and finance, refer to drastically different things.
Deflation
Deflation is the opposite of inflation – it refers to a decrease in prices across the economy. This occurs when inflation falls below zero, usually caused by a rising supply of goods and a lower supply of money. At first blush, decreased prices can seem like a good thing. However, the truth is more dangerous: Every time prices decrease, the relative value of each dollar increases. This causes consumers to delay spending in the hopes that tomorrow their dollars will be worth more and be able to purchase more goods. If deflation gets too bad, it can start a deflationary spiral, which can lead to a depression. Deflation signals the beginning of an economic crisis and needs to be addressed before too much damage is done.
Disinflation
Disinflation, on the other hand, is not directly related to the price levels of an economy. Instead, it refers to the rate at which those prices change. Disinflation is a slowdown in the rate of inflation, but the number remains positive, unlike with deflation. Disinflation is far more common of an economic condition than deflation. Like deflation, disinflation may seem like a good thing – and it can be, for some bond holders – but a falling level of inflation can point to other economic problems. These problems can mean that growth is slowing and unemployment is rising. Disinflation can be a good thing if the inflation rate is high (since it then prevents hyperinflation), but the closer the inflation rate gets to zero, the more of a warning sign disinflation becomes.
Summarizing: Deflation Vs Disinflation Differences
Overall, then, one way to look at this is by realizing that while disinflation can be a bad thing in an economy with already-low inflation rates, it can also be a good thing if inflation rates are high. Deflation, in contrast, is always a bad thing. Disinflation isn’t inherently destructive, but deflation is. Understanding the meanings and differences between these two terms is key to success in investments and finance.
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