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What is disinflation?

What is disinflation?
Though related deflation and disinflation are not synonymous, while deflation corresponds to decrease in the general price level in an economy, disinflation on the other hand means slowing in the rate of price rise or inflation. So, an increase in the general price level in an economy at a comparatively slower or decelerated pace over the short term is referred as disinflation while deflation is the exact opposite of inflation. To know about deflation in detail. Click here.

Generally, in order to curb high inflationary levels and thereby attain stable rate of inflation, central bank of an economy makes use of the different policy tools available with it. One such stance taken by the central bank in this scenario is an hike in the repo rates or the rates at which the central bank lends to the banking institutions in the country. With cost of funds in the market due to higher rate of interest moving higher demand gets impacted. Consequently, lower demand results in low growth that helps contain price level in an economy. So, interest rates on the higher side create a disinflationary effect.

Disinflation, in general, does not marks the onset of a slowing economy and this state is rather viewed to be normal during healthy economic times. On the other hand, when there is a threat that an economy can face deflation, the central bank lowers down interest rates aggressively so as to push demand and hence the price level. And, the state of deflation is seen as highly damaging as in such a situation consumers tend to defer their purchases which further lowers down the price level.

So, either of the extremes, unusual price rise as well as price fall can be damaging for an economy and difficult for policymakers to manage.

Story first published: Thursday, January 30, 2014, 15:01 [IST]
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