Unterinflation

Unterinflation, or under-inflation, is a condition in which the rate of price growth remains persistently below the central bank's inflation target. It is distinct from disinflation (a slowing of inflation) and from deflation (a negative inflation rate). Unterinflation signals prices are rising too slowly relative to the policy goal, rather than reversing course outright.

Central banks commonly aim for an inflation rate around a specified target, often about 2% in many advanced economies. Unterinflation occurs when the annual inflation rate remains below this target for an extended period, not merely for a short spell. Inflation is typically measured by consumer price indices (CPI) or, for policy purposes, the PCE price index; core inflation excludes volatile components such as energy and food.

Causes of Unterinflation include weak aggregate demand, deleveraging after financial or economic crises, slower wage growth, and high saving rates. External factors such as persistently low commodity prices or global slack in supply and demand can also dampen price increases. Structural features of an economy, including productivity growth and pricing power, may contribute as well.

Consequences can include entrenched low inflation expectations, reduced room to stimulate real activity through nominal interest rate cuts, and a higher burden of real debt. If Unterinflation persists, it raises the risk of deflation or a liquidity trap in some settings, limiting the effectiveness of conventional policy.

Policy responses typically involve monetary loosening—lowering policy rates, asset purchases, or forward guidance—and, when appropriate, expansionary fiscal measures or structural reforms. Some economists also consider price-level targeting or a higher long-run inflation goal to restore monetary space and credibility.