Disinflation

Slower price increases are still increases. The word is used constantly and read wrongly almost as often. Deflation is the genuinely different thing, and confusing the two produces bad decisions.

Rising, just more slowly

Disinflation is a fall in the rate of inflation. The rate of change of prices is positive and getting smaller: prices are still rising, just less quickly than before. It is not a fall in prices, and it is not a contraction in activity.

The confusion is built into the language. A headline says inflation fell because the percentage moved down, and a reader hears that prices fell. Both statements use one number, and only one of them describes the price level.

The shape of it

Because an index is a level, a falling rate still means a rising level. Suppose prices climb 8% 1yr and 3% the next: nothing got cheaper, and the second year's prices sit about 11% above where they started. The climb is slower, and every month still stands above the one before it.

Deflation is the different thing

Deflation is a negative rate: the price level itself falls. It sounds welcome and usually is not, because debts are fixed in money. If prices and incomes fall while a loan does not, the real burden of that loan grows, which is the opposite of what inflation does. Households and firms also delay spending when they expect cheaper prices later, and that drains demand further.

The checkable use is to separate the rate from the level. A falling inflation rate is disinflation; a falling price level is deflation. Look at the index, not the percentage, and name which of the two you are looking at before drawing a conclusion.

Related: Core Inflation · Inflation Expectations · Recession

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