What is Inflation, Deflation, Disinflation, Stagflation and Stagnation?
Lately, we’ve been hearing a lot of different terms used to describe what is happening in the economy. But what do they all mean? Here’s a quick guide to help you make sense of the headlines!
Inflation – The rate at which prices for goods and services rise, decreasing purchasing power. Moderate inflation is normal, but high inflation can be problematic.
An example of inflation is the U.S. inflation surge in 2021-2022 following the COVID-19 pandemic. During this period:
- Prices of goods and services rose rapidly, with inflation peaking at 9.1% in June 2022, the highest in over 40 years.
- Supply chain disruptions from the pandemic led to shortages, increasing costs for goods like cars, electronics, and food.
- Government stimulus programs and low interest rates boosted consumer demand, adding to price pressures.
- Energy prices soared due to geopolitical factors, including the Russia-Ukraine war, making transportation and heating more expensive.
The Federal Reserve responded by raising interest rates aggressively to slow inflation, eventually bringing it down in 2023.
Deflation – A decrease in the general price level of goods and services, often indicating weak demand and economic trouble.
An example of deflation is the Great Depression (1929–1939) in the United States. During this period:
- Prices of goods and services fell significantly.
- Wages declined, leading to lower consumer spending.
- Businesses reduced production and laid off workers.
- The money supply contracted due to bank failures, reducing available credit.
Deflation is dangerous because it can lead to a downward economic spiral where people delay purchases expecting lower prices, further reducing demand and slowing economic growth.
Disinflation refers to a slowdown in the rate of inflation, meaning prices are still rising, but at a slower pace than before. It’s different from deflation, which is when prices actually drop.
An example of disinflation is the U.S. economy in the early 1980s under Federal Reserve Chairman Paul Volcker. During this period:
- Inflation was high in the late 1970s, exceeding 10% annually due to oil price shocks and loose monetary policy.
- The Federal Reserve raised interest rates aggressively, peaking at around 20% in 1981, to slow inflation.
- Inflation gradually declined from over 10% in 1981 to around 3-4% by 1983, but prices still increased—just at a slower rate.
- Economic growth slowed briefly, leading to a recession (1981-1982), but inflation was successfully controlled.
This period is a classic example of disinflation because inflation was reduced without turning into deflation (where prices actually decrease).
Stagflation – A rare combination of stagnant economic growth, high unemployment, and high inflation.
An example of stagflation is the 1970s oil crisis in the United States. During this period:
- High inflation: Oil prices surged due to OPEC’s oil embargo (1973), leading to increased costs for goods and services.
- High unemployment: Economic growth slowed, and businesses struggled, leading to job losses.
- Stagnant economic growth: Despite rising prices, GDP growth was weak, creating an unusual combination of inflation and recession
Stagnation – A prolonged period of slow or no economic growth, often with high unemployment.
An example of stagnation is Japan’s “Lost Decade” (1990s-2000s). During this period:
- Economic growth was sluggish: Japan’s GDP growth was minimal despite various government stimulus efforts.
- Low consumer and business confidence: People and companies were hesitant to spend or invest.
- High debt levels: The banking system was burdened with bad loans from the burst of Japan’s 1980s asset bubble.
- Mild deflation: Prices remained stagnant or slightly declined, discouraging spending and investment.
This stagnation persisted for years, leading to prolonged economic weakness despite low interest rates and government intervention.
These terms can be quite similar, so I hope this list helps clarify their meanings and enhances your understanding of the articles you read.
