Deflation is when prices drop completely bringing the inflation rate lower than zero. This is typically caused by a significant drop in money supply, government spending, and consumer spending.
Disinflation on the other hand is simply the cooling of prices temporarily. If the inflation rate drops from 8% to 5%, this is disinflation at play. The U.S. economy has been experiencing disinflation ever since consumer prices hit a record high last summer.
Full Video Transcript Below:
J.D. DURKIN: Inflation is high. Everyone knows that. But when inflation begins to come back down, is it deflation or disinflation? Since you’re likely to hear both of these phrases used a lot as the Fed continues to raise interest rates, it’s worth a quick look at the difference. Deflation is when prices drop. You could think of deflation as the exact opposite of inflation. Deflation can be caused by several factors, ranging from drops in the money supply to government spending.
But disinflation, on the other hand, means that inflation is still increasing. It’s just increasing less than it previously increased. Therefore, disinflation is a reduction in the rate of inflation, not an outright reversal. If you ask five economists to predict where inflation goes from here, you’ll probably get 10 different responses. But now you know how to make sense of how inflation may come back down to earth, or at least not rise quite as quickly.