what is disinflation 
disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term understanding disinflationdisinflation is commonly used by the federal reserve fed to describe a period of slowing inflation it should not be confused with deflation which can be harmful to the economy unlike inflation and deflation which refer to the direction of prices disinflation refers to the rate of change in the rate of inflation disinflation is not considered problematic because prices do not actually drop and disinflation does not usually signal the onset of a slowing economy deflation is represented as a negative growth rate such as 1 while disinflation is shown as a change in the inflation rate say from 3 one year to 2 the next disinflation is considered the opposite of reflation which occurs when a government stimulates an economy by increasing the money supply a healthy amount of disinflation is necessary since it represents economic contraction and prevents the economy from overheating as such instances of disinflation are not uncommon and are viewed as normal during healthy economic times disinflation benefits certain segments of a population such as people who are inclined to save their earnings disinflation triggersseveral things can cause an economy to experience disinflation if a central bank decides to impose a tighter monetary policy and the government starts to sell off some of its securities it could reduce the supply of money in the economy causing a disinflationary effect similarly a contraction in the business cycle or a recession can also trigger disinflation for example businesses may choose not to increase prices to gain greater market share leading to disinflation disinflation since 1980the u s economy experienced one of its longest periods of disinflation from 1980 through 2015 during the 1970s the rapid rise of inflation came to be known as the great inflation with prices increasing more than 110 during the decade the annual rate of inflation topped out at 14 76 in early 1980 following the implementation of aggressive monetary policies by the fed to reduce inflation the increase in prices slowed in the 1980s rising just 59 for the period in the 1990s prices rose 32 followed by a 27 increase from 2000 to 2009 and a 9 increase from 2010 to 2015 during this period of disinflation stocks performed well averaging 8 65 in real returns from 1982 through 2015 disinflation also allowed the fed to lower interest rates in the 2000s which led to bonds generating above average returns here is the danger that disinflation presents when the rate of inflation falls near to zero as it did in 2015 it raises the specter of deflation although the rate of inflation was near zero in 2015 concerns over deflation were dismissed because it was largely attributed to falling energy prices as energy prices recovered in the period from 2016 to 2020 the rate of inflation picked up somewhat averaging 1 8 during that period moderated in 2020 by the covid 19 pandemic 1disinflation returnsdisinflation has reappeared in 2023 following inflation jumping to its highest level in four decades last year since the consumer price index cpi peaked at 9 1 in june 2022 the closely watched metric which measures the overall change in consumer prices has retreated 2 however inflation still sits at historically high levels well above the federal reserve s target of 2 a boston university research paper published in the mid 2000s examining a sustained period of disinflation in the early 1980s under then fed chair paul volcker provides perhaps the best indication of how the economy will perform in 2023 under similar conditions to those years 3