What is Disinflation?

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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.

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