Disinflation is one of those confusing economic terms. It is, however, easier to remember with some simple explanations.
First, we need to tackle the base of the term which is "inflation." Inflation is defined as an increase in the general prices of goods and service.
Put another way, inflation is a way to track the purchasing power of the dollar in your pocket, like this site’s US Inflation Calculator does over time. As inflation increases, the dollar buys fewer goods and services than it did before. For example, if the annual inflation rate picked up 3%, the same goods and services that were $1 last year would cost $1.03 this year.
In the United Sates, inflation is calculated by the Labor Department’s Bureau of Labor Statistics (BLS) and is based on the average price of thousands of goods and services.
Definition of Disinflation
Now with inflation better understood, we can talk about disinflation. Put simply, disinflation is a slowing of the rate of inflation over a period of time. It describes any decrease in the rate of inflation.
If economists state that the inflation rate for one month was at 3%, but declined to 2% in the next month, this is a period of disinflation because the rate of inflation slowed. It is important to note here, however, that in this example there is still a measured inflation rate of 2%. That number was just not as high as it was before, leading to our term of disinflation.
Remember that disinflation is a slow-down in the inflation rate.
Deflation Happens at Negative Inflation Rate
Disinflation is easy to confuse or incorrectly switch with the economic term named deflation. Deflation happens when the inflation rate actually drops to below 0%.
Disinflation can lead to deflation when the inflation rate is already low. For example, if the annual inflation rate is 0.5% and disinflation kicks in over the next 12 months to such a degree that the annual inflation rate turns down to -0.1%, that is a deflationary level.