What is Disinflation?
19-02-2024
09:54 AM
1 min read
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Overview:
Reserve Bank of India (RBI) governor recently said recurring food price shocks and renewed flash points on the geo-political front pose a challenge to the ongoing disinflation process.
About Disinflation
- Disinflation is a decrease in inflation rates.
- In simple terms, a decline in the rate of increase in the general price level of goods and services in the gross domestic product (GDP) of a country over time is called disinflation.
- 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.
- A healthy amount of disinflation is necessary since it represents economic contraction and prevents the economy from overheating.
- Disinflation is considered the opposite of reflation, which occurs when a government stimulates an economy by increasing the money supply.
- Causes of Disinflation:
- Many reasons can cause disinflation in an economy.
- If a central bank wants to enforce a tighter monetary policy and the government starts selling off some of its assets, the supply of money in the economy could be limited, causing a disinflationary effect.
- Similarly, disinflation can also be caused by a contraction in the business cycle of recession. For instance, companies may choose not to raise prices to gain more significant market share, leading to disinflation.
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Q1) What is gross domestic product (GDP)?
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
Source: RBI alert on food prices with recurring food price shocks and renewed flash points on geo-politics