Many think that deflation and disinflation are synonymous and use them interchangeably as they lead to fall in the general price level, due to which money supply fall in the economy. Nevertheless, these two terms are different in a sense that the former, is a situation where the price of the goods and services goes down while the latter is when the rate of inflation is declining with time. Disinflation may result in deflation. Take a read of this article carefully to know the important differences between deflation and disinflation.
Content: Deflation Vs Disinflation
|Basis for Comparison||Deflation||Disinflation|
|Meaning||When there is a fall in the general price level, in the whole economy, such a situation is known as deflation.||Disinflation is a situation when the rate of inflation tends to fall over time but remains positive.|
|Cause||Shifts in demand and supply curve.||Deliberate policy of government.|
|Occurs||Prior to full employment.||Subsequent to full employment.|
|Prices||No limit of fall in prices.||Can be brought down to normal level.|
Definition of Deflation
Deflation is described as a period when the prices of the economic output fall in the economy due to the decrease in the money supply, consumer demand, investments and government spending. It occurs when the rate of inflation is less than 0% i.e. negative. It results in the rise in the real value of money. In such a situation, the purchasing power of the people goes up, and now they can buy more goods with the same amount of money.
In deflation, there is a steep decline in the general price level, which indicates an unhealthy condition of the economy. It can cause high unemployment, increase layoff, fall in the wage rates, decrease profits, low demand, low income, restricted credit supply in the economy. Deflation often leads the economy to depression. To counter deflation, Central Bank infuses credit supply in the economy.
Definition of Disinflation
Disinflation is a state when the rate of inflation is diminishing over time, but yet positive and continues until the rate is equal to zero. It is the deceleration in the rate of increase in the overall price level in the economy i.e. the prices of goods and services are not rising, as they used to rise earlier. The general price level rises in disinflation, but the rate of inflation decreases over the period.
Key Differences Between Deflation and Disinflation
The difference between deflation and disinflation can be drawn clearly on the following grounds:
- Deflation is described as a condition where the general price level declines, in the entire economy. Disinflation is a state when there is a fall in the inflation rate over time.
- A situation when the rate of inflation is positive but reducing with time is disinflation. On the other hand, when the inflation rate is negative, this situation is called deflation.
- Deflation is in contrast to inflation, whereas disinflation is opposed to reflation.
- The main cause of deflation is the shift in demand and supply of the economic output. Conversely, disinflation is a deliberate policy of the government.
- When we talk about employment level, deflation occurs before 100% employment while disinflation occurs after reaching the stage of 100% employment.
- In a deflation, the prices fall below the normal level, as there is no limit of fall in prices. As opposed to disinflation, which helps in bringing down the prices to a normal level.
For understanding the term deflation and disinflation, it is necessary to know the meaning of inflation, which is a situation when the prices of the economic output rise. When the rate of inflation slows down, it is disinflation, and it continues until the rate is zero, but when the rate is less than zero, it is deflation. The basic difference between these two is that deflation is the result of a fall in the overall price level while disinflation is the outcome of a fall in the inflation rate.