De-coding disinflation and deflation
Inflation refers to rise in prices of commodities and services in an economy. On the same terms, deflation refers to lowering of price levels. On the other hand, disinflation is a term that defines slower inflation rate.
In the case of disinflation, prices don’t come down, unlike deflation. At present, the Indian economy is observing a price rise. Although, inflation – both Consumer Price Inflation (CPI) and Wholesale Price Inflation (WPI) – has come down significantly, but still not inside comfort level of Reserve Bank of India (RBI). Talking about India, we are presently witnessing disinflation as prices have not come down very much. Economists regard disinflation as a positive indication and even bond markets react in an affirmative way to the development. However, when disinflation doesn’t accompany growth in an economy, it’s a point of worry. A bit of inflation is always welcome, showing good consumption by economy but economic growth should also complement price rise – not seen in the case of India, at present. Lowering inflation levels without providing any impetus to economic growth or gross domestic product (GDP) growth only shows declining productivity and rising unemployment. At present, economists predict disinflation along with GDP growth in the coming quarter for India.
Deflation is the time when economy observes actual price fall. With lower productivity and economic slowdown arrives deflation. Under deflationary scenario, value of money increases. During inflation value of currency decreases. Hence, people are forced to deposit their money to purchase goods when prices fall down more. This causes a slowdown in the economy. Japan is struggling with deflation for the past 20 years and thus, its central bank has opted for quantitative easing to pump in more money in its economy to force people to start spending. Only advantage of deflation for an economy is that the exports become much more competitive, but importers also start bargaining more, and this offsets the gain to some extent.