Disinflation

Disinflation is a decline in the rate of inflation—the pace at which the general price level is rising slows down. It means prices are still increasing, but at a smaller rate than before. Disinflation is not deflation; deflation occurs when the inflation rate becomes negative and prices fall on average.

Causes of disinflation can include deliberate monetary or fiscal policy aimed at cooling demand, such as higher interest rates or reduced fiscal stimulus. It can also arise from favorable supply-side developments, such as lower input costs or a slower rise in important commodities, which reduce upward pressure on prices. Disinflation may be temporary or more persistent, depending on the underlying forces.

Measurement typically uses annual inflation rates derived from consumer price indices (CPI) or alternative measures like the personal consumption expenditures price index (PCE). Disinflation differs from deflation, which is a negative inflation rate, and from a period of stable, low inflation where the rate remains near a constant positive value.

Economic implications vary. For consumers, disinflation can improve real purchasing power if wages do not keep pace with rising prices. For businesses and policymakers, it may indicate a cooling of demand pressures but can also forewarn slower economic growth or higher unemployment if policy or demand weakens excessively. Central banks often interpret disinflation as progress toward price stability but must balance the risk of slipping into deflation or undermining growth.

Examples of disinflation occur when inflation rates fall from higher to lower yet remain positive, such as during periods of policy tightening or after spikes in energy or commodity prices have passed.