You know what I’ve noticed? There is much confusion over the terms disinflation, inflation and deflation. This will not do…no, no, no. This will not do at all, but don’t worry because I will absolutely clear that confusion up. On this page, you will learn what disinflation is. After reading the contents of this page, you will hopefully leave here a more enlightened person; which will make me very happy. So, let’s get to it.
What is Disinflation?
If you check out my article titled “inflation“, you will learn what inflation is. Disinflation is the decreasing or contraction of inflation. Here’s an example. Let’s say that an economy is experiencing an annual inflation rate of 3.5 percent during the month of June. Then the next month, the economy’s annual inflation rate decreases to 3.1 percent. As you see, the economy has experienced disinflation. The inflation rate has decreased or dis-inflated. That’s all it is. Whenever the rate of inflation decreases, you have disinflation.
Causes of Disinflation
A variety of factors can cause disinflation. The primary and most probable factor is a decrease in a country’s money supply. If a central bank enacts a contractionary monetary policy such as the selling of government securities (this monetary policy is as known as quantitative tightening which is the opposite of quantitative easing), then it would be essentially removing money from an economy’s money supply. By doing that, money would be more expensive as the supply goes down and demand remains constant.
As money becomes more expensive to obtain, demand goes down overall for goods and services. If supply remains unchanged and demand goes down for goods and services, then prices will fall over time. If prices fall, inflation decreases. Voila, you have disinflation. In its most simplest form, if you have a decrease in demand and consumption for goods and services without having an equal decrease in supply, then you will have disinflation. Making money more expensive usually causes a decrease in demand and consumption. Central banks usually accomplishes this by ‘tightening monetary policy’.