What is the difference between Deflation and Disinflation?



Deflation is different from disinflation. While deflation refers to a situation of general depression and widespread unemployment caused by insufficiency of effective demand, disinflation is a process of reversing inflation without creating unemployment or reducing output. In fact, disinflation is an attempt aiming at reducing the prices when they are abnormally high.

Deflation and Disinflation resemble each other because:

(a) in both cases, money supply decreases and

(b) both lead to a fall in the price level.

But, despite this similarity, there are some basic differences between the two situations:

(a) Deflation causes a serious problem of mass unemployment and reduction in output in the economy, while disinflation does not create such problem ; it rather saves the economy from the ruinous effects of inflation,

(b) While deflation may be due to certain natural causes or it may be the result of a deliberate policy of the government, but disinflation is always the direct result of a deliberate policy of the government,

(c) Deflation occurs before the level of full employment, whereas disinflation occurs after the level of full employment,

(d) The prices can be brought down to the normal level with the help of disinflation. But deflation may reduce the prices even below the normal level. In fact, there is no limit to tie falling prices during deflation.