Disinflation

Reviewed by Anjaneyulu | Updated on Aug 27, 2020

Introduction

Disinflation is a decrease in inflation rates. In simple terms, a decline in the rate of increase in the general price level of goods and services in the gross domestic product (GDP) of a country over time.

Disinflation is the reverse of reflation. The central bank commonly uses disinflation to describe a period of slowing inflation. In contrast to inflation which refers to price direction, disinflation refers to the rate of inflation change.

Disinflation is not problematic, and it is different from deflation. In disinflation, prices do not drop, and it does not signal the start of a slowing economy. Disinflation is represented as a negative rate of growth, such as -1%, while disinflation is shown as an inflation rate change from 3% a year to 2% a year. Disinflation is the opposite of reflation, where a government stimulates the economy by increasing the supply of money.

Causes of Disinflation

Many reasons can cause a disinflation in an economy. If a central bank wants to enforce a tighter monetary policy and the government starts selling off some of its assets, the supply of money in the economy could be limited, causing a disinflationary effect.

Similarly, disinflation can also be caused by a contraction in the business cycle of recession. For instance, companies may choose not to raise prices to gain more significant market share, leading to disinflation.

Disinflation in India

Through 2012 to 2014, the latest all-India CPI stood close to double digits, averaging 10.1% in 2012-13 and 9.8% in 2013-14. But there has been a dramatic plunge since. In 2014-15, average inflation dropped to 6% down 400 bps from the previous two years. And it's a further 140 bps lower so far in 2015-16, averaging 4.6% between April and October.

Measured by the annualized quarterly growth in the seasonally adjusted CPI, the momentum of inflation also declined from 12.9% in the last quarter of 2013 to just 2.9% quarter over quarter, seasonally adjusted annual rate (SAAR) from August-October 2015.