We are increasingly hearing terms such as Inflation, Deflation, and Disinflation if we refer to any newspaper or watch any news channel these days. Inflation is something most people are familiar with, but deflation and disinflation are a little more difficult to understand. There are three terms that describe the various conditions of a single term called Price Level, which describes what prices various commodities are available to us in the market at.
Generally, inflation refers to an increase in the price of goods and services over a long period of time. As an example. Think about the prices of goods that you used to buy a few months back. Now, if you go and buy the same good, and you have to pay more for it, it would indicate inflation. When inflation levels of prices increase, the purchasing power of each currency decreases, so people can buy fewer goods and can avail fewer services as a result. As a measure of inflation of prices, we need to know the rate of inflation. This can be obtained from the general price index, in most cases we use the Consumer Price Index (CPI). The inflation rate is determined from the net annual increase in the percentage of the consumer price index. A CPI measures the changes in price levels within a basket market of goods and services. Inflation is also known as Hyperinflation, which refers to a condition in which the prices have increased very rapidly, as never before.
Deflation, as its name implies, occurs when prices fall. Inflation is the exact opposite of deflation. Inflation is referred to as Deflation when it falls below zero percent. You can, for example, look at the prices of goods that you used to buy a few months ago, and now if you go to buy the same goods, you have to pay less for them, then Deflation has affected the market. When people start getting lower prices for their goods, deflation is not good for the economy because it causes them to stop producing goods. Deflation, according to various economists around the world, negatively affects the economy by causing debt increases and even worsening recessions. In reality, Deflation in any country for a long period of time would be detrimental to the growth and development of the country, especially for those with little understanding of economics. Deflation occurred during the Great Depression in the United States when prices for almost all goods and services spiked suddenly.
Disinflation is actually the most misunderstood term of all time. People often mistake it for the exact opposite of inflation, but it isn’t that simple. A condition of disinflation is a state in which inflation has been impeded, meaning that inflation levels have decreased, but they have not slipped below zero, as if they did, Deflation would occur. Simply put, it means a decrease in inflation rates. Let’s say. Consider the prices of the goods that you used to buy a few months ago and now if you purchase the same goods and have to pay a bit more for the same goods, (you would have observed this if you had compared prices last time when you went to purchase the goods and had to pay more than you are paying at the moment), disinflation would have taken place. Disinflation can also be understood by the unemployment rate, for instance. The inflation rate will go down if unemployment is growing faster than natural growth, resulting in disinflation. Each of the parameters in an economy should be closely monitored, with inflation being the most important.