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Sunday, 28 December 2008

Difference between deflation and disinflation


Updated on 23 July 2013

Deflation is a sustained decrease in the general price level resulting in a sustained increase in the real value of money and other monetary items not deflation-adjusted daily as well as constant real value non-monetary items treated as monetary items (e.g. trade debtors, trade creditors, all other non-monetary receivables, all other non-monetary payables, etc.), i.e., not measured in units of constant purchasing power in terms of a daily index, under Historical Cost Accounting. These items are worth more in real value all the time during deflation as opposed to being worth less in real value all the time during inflation. Deflation is negative inflation. The above only applies to monetary items not deflation-adjusted daily under Capital Maintenance in Units of Constant Purchasing Power. Constant items are always and everywhere measured in units of constant purchasing power in terms of a daily index under CMUCPP.

Disinflation is lower inflation. Prices are still rising during disinflation, but at a lower rate. The general price level still rises, but, at a slower rate resulting in a continued, but, lower rate of real value destruction in money and other monetary items as well as constant real value non-monetary items treated as monetary items. A lowering of inflation is not deflation but disinflation.

Under Accounting Capital Maintenance in Units of Constant Purchasing Power under which all constant real value non-monetary items are always measured in units of constant purchasing power in terms of a daily index only money and monetary items not inflation-adjusted daily lose real value all the time during inflation and disinflation and gain in real value all the time during deflation.

Under Economic Capital Maintenance in Units of Constant Purchasing Power under which

(1) all constant real value non-monetary items are always and everywhere measured in units of constant purchasing power in terms of a daily index and

(2) all monetary items (except local currency bank notes and coins outside the banking system) are inflation-adjusted or deflation-adjusted daily

only local currency bank notes and coins outside the banking system lose real value all the time during inflation and disinflation and gain in real value all the time during deflation.

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Deflation means the general price level is not increasing at all, but, actually decreasing continuously and the internal functional currency – money - and other monetary items as well as constant items treated as monetary items under HCA not deflation-adjusted daily in terms of a daily index are worth more all the time. Deflation causes an increase in the real value of money and other monetary items as well as constant items treated as monetary items under HCA not deflation-adjusted daily in terms of a daily index.

Inflation destroys real value in money and monetary items not inflation-adjusted daily as well as constant items treated as monetary items under HCA, i.e., not measured in units of constant purchasing power in terms of daily index. Disinflation destroys real value in money, etc. more slowly. Deflation creates real value in money, etc.

Inflation is a sustained increase in the general price level. Disinflation is a slower sustained increase in the general price level. Deflation is a sustained decrease in the general price level.

Disinflation happens after a period of higher inflation in what are normally considered low inflation economies and is sometimes initially popularly confused with deflation. During disinflation many prominent prices, for example, oil, fuel, commodity, property and food prices are falling, but, the general price level is still actually rising, albeit at a much slower rate than during normal low inflation. When the slowing annual inflation rate moves lower and lower it eventually gets to a zero percent annual rate for maybe a month or two. When the general price level then continues to decline even further - below zero percent per annum - the economy flips over (a very big change) from inflation to deflation: not just a slower increase in the general increasing price level as during disinflation but actually a sustained decrease in the general price level below zero percent per annum which causes an increase in the real value of money, etc.: the opposite of inflation or negative inflation.

Countries (excluding Japan) have little recent experience of deflation. Deflation is generally regarded as a very serious economic problem that everyone is trying to avoid at all costs especially after what happened during the Great Depression.


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