What is deflation and how is it different from disinflation? How
long a period must the general price level fall before it would be called
a deflation? What are the main causes of a deflation?
The MIT Dictionary of Modern Economics defines deflation as
"A sustained fall in the general price level."(1)
Deflation represents the opposite of inflation, which is defined
as an increase in the overall price level over a period of time. In contrast,
disinflation, represents a period when the inflation rate is
positive, but declining over time.
Deflation, inflation, and disinflation represent different behavior
of the price level. The price level is commonly measured using either
a Gross Domestic Product Deflator (GDP Deflator) or a Consumer Price Index
(CPI) indicator. The GDP Deflator is a broad index of inflation in the
economy; the CPI Index measures changes in the price level of a broad
basket of consumer products. The Chart shows
the monthly percentage change in the CPI (all urban consumers, all items)
over the prior 12-month period, and includes periods of deflation, inflation,
and disinflation in consumer prices.
Two brief periods, the first from approximately mid-1949 to mid-1950,
and the second, approximately from the fall of 1954 to the summer of 1955,
shown in Chart, indicate brief periods of deflation in the consumer price
index. Other than these two brief periods, the CPI Index shows inflation
in consumer prices over nearly the entire 1947 to 1999 period. The period
from mid-1980 to mid-1983 indicates a period of disinflation, a period
when the rate of inflation was declining from month to month.
Periods of deflation typically are associated with downturns in the economy.
The two temporary periods of deflation corresponded to recessions in the
U.S. economy. However, periods of deflation need not be as short as these
two brief episodes in the 1950s. During the Great Depression of the 1930s
the nation experienced a long period of deflation. As noted by Samuelson
and Nordhaus (1998), "Sustained deflations, in which prices fall steadily
over a period of several years, are associated with depressions, such
as occurred in the 1930s or the 1890s."(2)
Pearce, David W., editor. The MIT Dictionary of
Modern Economics. 1992. MIT University Press.
Samuelson, Paul A., and William D. Nordhaus. Economics.
1998. The McGraw-Hill Companies.